Is Grown Up Group Investment Holdings (HKG:1842) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Grown Up Group Investment Holdings Limited (HKG:1842) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Grown Up Group Investment Holdings

How Much Debt Does Grown Up Group Investment Holdings Carry?

As you can see below, Grown Up Group Investment Holdings had HK$74.3m of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have HK$20.2m in cash offsetting this, leading to net debt of about HK$54.1m.

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

Zooming in on the latest balance sheet data, we can see that Grown Up Group Investment Holdings had liabilities of HK$155.8m due within 12 months and liabilities of HK$669.0k due beyond that. Offsetting these obligations, it had cash of HK$20.2m as well as receivables valued at HK$65.7m due within 12 months. So its liabilities total HK$70.5m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Grown Up Group Investment Holdings is worth HK$157.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, Grown Up Group Investment Holdings reported revenue of HK$325m, which is a gain of 32%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Grown Up Group Investment Holdings still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost HK$6.5m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of HK$5.4m into a profit. So to be blunt we do think it is risky. 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. For instance, we've identified 4 warning signs for Grown Up Group Investment Holdings (3 don't sit too well with us) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.