Is Greatime International Holdings (HKG:844) Using Debt Sensibly?

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. Importantly, Greatime International Holdings Limited (HKG:844) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 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 Greatime International Holdings

What Is Greatime International Holdings's Debt?

As you can see below, at the end of December 2023, Greatime International Holdings had CN¥162.0m of debt, up from CN¥107.5m a year ago. Click the image for more detail. But on the other hand it also has CN¥280.1m in cash, leading to a CN¥118.1m net cash position.

How Healthy Is Greatime International Holdings' Balance Sheet?

The latest balance sheet data shows that Greatime International Holdings had liabilities of CN¥331.2m due within a year, and liabilities of CN¥6.21m falling due after that. Offsetting this, it had CN¥280.1m in cash and CN¥53.6m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Of course, Greatime International Holdings has a market capitalization of CN¥183.4m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Greatime International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Greatime International Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Greatime International Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 8.4%, to CN¥509m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Greatime International Holdings?

While Greatime International Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥32m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Greatime International Holdings is showing 2 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.