Is Greatwalle (HKG:8315) Using Debt Sensibly?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Greatwalle Inc. (HKG:8315) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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

How Much Debt Does Greatwalle Carry?

As you can see below, at the end of September 2022, Greatwalle had HK$31.1m of debt, up from HK$26.7m a year ago. Click the image for more detail. But on the other hand it also has HK$50.9m in cash, leading to a HK$19.8m net cash position.

How Strong Is Greatwalle's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Greatwalle had liabilities of HK$56.8m due within 12 months and liabilities of HK$11.2m due beyond that. Offsetting this, it had HK$50.9m in cash and HK$8.97m in receivables that were due within 12 months. So it has liabilities totalling HK$8.20m more than its cash and near-term receivables, combined.

Since publicly traded Greatwalle shares are worth a total of HK$104.7m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Greatwalle boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Greatwalle will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Greatwalle wasn't profitable at an EBIT level, but managed to grow its revenue by 24%, to HK$74m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Greatwalle?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Greatwalle had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through HK$15m of cash and made a loss of HK$27m. Given it only has net cash of HK$19.8m, the company may need to raise more capital if it doesn't reach break-even soon. Greatwalle's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Greatwalle is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.