We Think Greatime International Holdings (HKG:844) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Greatime International Holdings Limited (HKG:844) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Greatime International Holdings

What Is Greatime International Holdings's Net Debt?

As you can see below, at the end of December 2020, Greatime International Holdings had CN¥108.1m of debt, up from CN¥102.6m a year ago. Click the image for more detail. However, it does have CN¥140.6m in cash offsetting this, leading to net cash of CN¥32.5m.

How Healthy Is Greatime International Holdings' Balance Sheet?

The latest balance sheet data shows that Greatime International Holdings had liabilities of CN¥176.5m due within a year, and liabilities of CN¥2.27m falling due after that. On the other hand, it had cash of CN¥140.6m and CN¥57.1m worth of receivables due within a year. So it actually has CN¥19.0m more liquid assets than total liabilities.

This surplus suggests that Greatime International Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Greatime International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Greatime International Holdings made a loss at the EBIT level, last year, but improved that to positive EBIT of CN¥14m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Greatime International Holdings will need earnings to service that debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Greatime International Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Greatime International Holdings actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Greatime International Holdings has CN¥32.5m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥26m, being 183% of its EBIT. So is Greatime International Holdings's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Greatime International Holdings has 1 warning sign we think you should be aware of.

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. 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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