Is Greatime International Holdings (HKG:844) Weighed On By Its Debt Load?

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, Greatime International Holdings Limited (HKG:844) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Greatime International Holdings

What Is Greatime International Holdings's Net Debt?

As you can see below, at the end of June 2024, Greatime International Holdings had CN¥162.1m of debt, up from CN¥107.7m a year ago. Click the image for more detail. But on the other hand it also has CN¥235.3m in cash, leading to a CN¥73.2m net cash position.

How Strong Is Greatime International Holdings' Balance Sheet?

The latest balance sheet data shows that Greatime International Holdings had liabilities of CN¥335.0m due within a year, and liabilities of CN¥4.19m falling due after that. Offsetting this, it had CN¥235.3m in cash and CN¥71.7m in receivables that were due within 12 months. So it has liabilities totalling CN¥32.1m more than its cash and near-term receivables, combined.

Since publicly traded Greatime International Holdings shares are worth a total of CN¥179.2m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Greatime International Holdings 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 Greatime International 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, Greatime International Holdings reported revenue of CN¥508m, which is a gain of 7.3%, although it did not report any earnings before interest and tax. 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. To that end, you should learn about the 3 warning signs we've spotted with Greatime International Holdings (including 2 which are concerning) .

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.