Goal Forward Holdings (HKG:1854) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Goal Forward Holdings Limited (HKG:1854) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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 Goal Forward Holdings

What Is Goal Forward Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Goal Forward Holdings had HK$43.4m of debt in March 2021, down from HK$48.5m, one year before. But it also has HK$45.5m in cash to offset that, meaning it has HK$2.10m net cash.

How Strong Is Goal Forward Holdings' Balance Sheet?

The latest balance sheet data shows that Goal Forward Holdings had liabilities of HK$50.6m due within a year, and liabilities of HK$1.71m falling due after that. Offsetting this, it had HK$45.5m in cash and HK$19.7m in receivables that were due within 12 months. So it actually has HK$12.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Goal Forward Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Goal Forward 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 Goal Forward 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.

Over 12 months, Goal Forward Holdings made a loss at the EBIT level, and saw its revenue drop to HK$107m, which is a fall of 31%. That makes us nervous, to say the least.

So How Risky Is Goal Forward Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Goal Forward Holdings had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through HK$2.3m of cash and made a loss of HK$8.2m. With only HK$2.10m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Be aware that Goal Forward Holdings is showing 4 warning signs in our investment analysis , and 2 of those are a bit concerning...

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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