Is Goal Forward Holdings (HKG:1854) Using Too Much Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Goal Forward Holdings Limited (HKG:1854) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for Goal Forward Holdings

What Is Goal Forward Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that Goal Forward Holdings had HK$40.7m of debt in September 2021, down from HK$46.0m, one year before. But it also has HK$67.1m in cash to offset that, meaning it has HK$26.4m net cash.

How Strong Is Goal Forward Holdings' Balance Sheet?

The latest balance sheet data shows that Goal Forward Holdings had liabilities of HK$48.9m due within a year, and liabilities of HK$1.85m falling due after that. Offsetting these obligations, it had cash of HK$67.1m as well as receivables valued at HK$26.7m due within 12 months. So it actually has HK$43.0m 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. Simply put, the fact that Goal Forward Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

In the last year Goal Forward Holdings had a loss before interest and tax, and actually shrunk its revenue by 2.5%, to HK$121m. That's not what we would hope to see.

So How Risky Is Goal Forward Holdings?

While Goal Forward Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$9.2m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. Be aware that Goal Forward Holdings is showing 4 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.