Health Check: How Prudently Does Greatwalle (HKG:8315) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Greatwalle Inc. (HKG:8315) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Greatwalle

What Is Greatwalle's Debt?

As you can see below, Greatwalle had HK$28.9m of debt at March 2022, down from HK$97.2m a year prior. But on the other hand it also has HK$70.0m in cash, leading to a HK$41.1m net cash position.

How Healthy Is Greatwalle's Balance Sheet?

We can see from the most recent balance sheet that Greatwalle had liabilities of HK$55.5m falling due within a year, and liabilities of HK$14.7m due beyond that. Offsetting these obligations, it had cash of HK$70.0m as well as receivables valued at HK$7.70m due within 12 months. So it can boast HK$7.49m more liquid assets than total liabilities.

This short term liquidity is a sign that Greatwalle could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Greatwalle has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Greatwalle'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.

In the last year Greatwalle had a loss before interest and tax, and actually shrunk its revenue by 8.2%, to HK$57m. We would much prefer see growth.

So How Risky Is Greatwalle?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Greatwalle lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through HK$15m of cash and made a loss of HK$36m. With only HK$41.1m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Greatwalle you should be aware of, and 1 of them makes us a bit uncomfortable.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.