Is Grown Up Group Investment Holdings (HKG:1842) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Grown Up Group Investment Holdings Limited (HKG:1842) does have debt on its balance sheet. But is this debt a concern to shareholders?

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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Grown Up Group Investment Holdings

What Is Grown Up Group Investment Holdings's Debt?

As you can see below, at the end of June 2020, Grown Up Group Investment Holdings had HK$84.6m of debt, up from HK$62.4m a year ago. Click the image for more detail. However, it does have HK$63.8m in cash offsetting this, leading to net debt of about HK$20.8m.

How Strong Is Grown Up Group Investment Holdings's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Grown Up Group Investment Holdings had liabilities of HK$238.5m due within 12 months and liabilities of HK$6.23m due beyond that. Offsetting these obligations, it had cash of HK$63.8m as well as receivables valued at HK$97.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$83.4m.

While this might seem like a lot, it is not so bad since Grown Up Group Investment Holdings has a market capitalization of HK$290.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 Grown Up Group Investment Holdings 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 Grown Up Group Investment Holdings had a loss before interest and tax, and actually shrunk its revenue by 38%, to HK$333m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Grown Up Group Investment 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$25m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through HK$21m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Grown Up Group Investment Holdings has 4 warning signs (and 2 which are potentially serious) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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