Would Grand Talents Group Holdings (HKG:8516) Be Better Off With Less Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Grand Talents Group Holdings Limited (HKG:8516) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Grand Talents Group Holdings

What Is Grand Talents Group Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Grand Talents Group Holdings had debt of HK$37.0m, up from HK$18.4m in one year. However, it also had HK$11.8m in cash, and so its net debt is HK$25.2m.

How Strong Is Grand Talents Group Holdings's Balance Sheet?

According to the last reported balance sheet, Grand Talents Group Holdings had liabilities of HK$52.1m due within 12 months, and liabilities of HK$617.0k due beyond 12 months. On the other hand, it had cash of HK$11.8m and HK$87.4m worth of receivables due within a year. So it actually has HK$46.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Grand Talents Group Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Carrying virtually no net debt, Grand Talents Group Holdings has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Grand Talents Group Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Grand Talents Group Holdings made a loss at the EBIT level, and saw its revenue drop to HK$64m, which is a fall of 39%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Grand Talents Group Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at HK$23m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. This one is a bit too risky for our liking. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Grand Talents Group Holdings has 3 warning signs (and 2 which make us uncomfortable) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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