Would Greatime International Holdings (HKG:844) Be Better Off With Less 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.' 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. We note that Greatime International Holdings Limited (HKG:844) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 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, plenty of companies use debt to fund growth, without any negative consequences. 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, Greatime International Holdings had CN¥109.7m of debt at June 2020, down from CN¥125.4m a year prior. However, it also had CN¥105.1m in cash, and so its net debt is CN¥4.62m.

How Healthy Is Greatime International Holdings's Balance Sheet?

We can see from the most recent balance sheet that Greatime International Holdings had liabilities of CN¥197.2m falling due within a year, and liabilities of CN¥1.96m due beyond that. Offsetting this, it had CN¥105.1m in cash and CN¥72.9m in receivables that were due within 12 months. So it has liabilities totalling CN¥21.1m more than its cash and near-term receivables, combined.

Since publicly traded Greatime International Holdings shares are worth a total of CN¥173.3m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 made a loss at the EBIT level, and saw its revenue drop to CN¥378m, which is a fall of 11%. We would much prefer see growth.

Caveat Emptor

While Greatime International Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥5.0m 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. However, it doesn't help that it burned through CN¥27m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Greatime International Holdings has 3 warning signs (and 1 which can't be ignored) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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