Is Greatwalle (HKG:8315) Weighed On By Its Debt Load?

Simply Wall St
November 20, 2021
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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 Greatwalle Inc. (HKG:8315) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Greatwalle

What Is Greatwalle's Net Debt?

The chart below, which you can click on for greater detail, shows that Greatwalle had HK$27.0m in debt in September 2021; about the same as the year before. However, it does have HK$74.4m in cash offsetting this, leading to net cash of HK$47.4m.

SEHK:8315 Debt to Equity History November 21st 2021

How Strong Is Greatwalle's Balance Sheet?

The latest balance sheet data shows that Greatwalle had liabilities of HK$54.7m due within a year, and liabilities of HK$17.2m falling due after that. Offsetting this, it had HK$74.4m in cash and HK$9.27m in receivables that were due within 12 months. So it actually has HK$11.8m 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. Succinctly put, Greatwalle boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. 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 had a loss before interest and tax, and actually shrunk its revenue by 7.9%, to HK$60m. 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 in the last year Greatwalle had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through HK$16m of cash and made a loss of HK$24m. Given it only has net cash of HK$47.4m, the company may need to raise more capital if it doesn't reach break-even 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. 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. We've identified 4 warning signs with Greatwalle (at least 2 which make us uncomfortable) , and understanding them should be part of your investment process.

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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