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. Importantly, Grown Up Group Investment Holdings Limited (HKG:1842) does carry debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Grown Up Group Investment Holdings

What Is Grown Up Group Investment Holdings's Net Debt?

As you can see below, Grown Up Group Investment Holdings had HK$37.4m of debt at June 2023, down from HK$74.3m a year prior. However, it does have HK$60.1m in cash offsetting this, leading to net cash of HK$22.8m.

A Look At Grown Up Group Investment Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Grown Up Group Investment Holdings had liabilities of HK$98.7m due within 12 months and liabilities of HK$2.31m due beyond that. Offsetting these obligations, it had cash of HK$60.1m as well as receivables valued at HK$49.7m due within 12 months. So it can boast HK$8.89m more liquid assets than total liabilities.

This short term liquidity is a sign that Grown Up Group Investment Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Grown Up Group Investment Holdings 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 it is Grown Up Group Investment Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Grown Up Group Investment Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to HK$364m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Grown Up Group Investment Holdings?

Although Grown Up Group Investment Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of HK$1.8m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 5 warning signs we've spotted with Grown Up Group Investment Holdings (including 1 which is potentially serious) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.