Goal Forward Holdings (HKG:1854) Is Carrying A Fair Bit Of Debt

Warren Buffett famously said, '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. As with many other companies Goal Forward Holdings Limited (HKG:1854) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Goal Forward Holdings

What Is Goal Forward Holdings's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Goal Forward Holdings had debt of HK$46.0m, up from HK$25.7m in one year. On the flip side, it has HK$36.7m in cash leading to net debt of about HK$9.36m.

How Strong Is Goal Forward Holdings's Balance Sheet?

The latest balance sheet data shows that Goal Forward Holdings had liabilities of HK$53.8m due within a year, and liabilities of HK$2.51m falling due after that. On the other hand, it had cash of HK$36.7m and HK$33.4m worth of receivables due within a year. So it actually has HK$13.8m 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. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Goal Forward Holdings made a loss at the EBIT level, and saw its revenue drop to HK$124m, which is a fall of 31%. To be frank that doesn't bode well.

Caveat Emptor

While Goal Forward 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 HK$859k at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. This one is a bit too risky for our liking. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Goal Forward Holdings (2 shouldn't be ignored) you should be aware of.

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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