Greater Bay Area Dynamic Growth Holding (HKG:1189) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Greater Bay Area Dynamic Growth Holding Limited (HKG:1189) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. 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 Greater Bay Area Dynamic Growth Holding

What Is Greater Bay Area Dynamic Growth Holding's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Greater Bay Area Dynamic Growth Holding had HK$22.0m of debt in June 2022, down from HK$58.8m, one year before. But it also has HK$1.78b in cash to offset that, meaning it has HK$1.76b net cash.

How Healthy Is Greater Bay Area Dynamic Growth Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Greater Bay Area Dynamic Growth Holding had liabilities of HK$76.3m due within 12 months and liabilities of HK$19.6m due beyond that. Offsetting these obligations, it had cash of HK$1.78b as well as receivables valued at HK$66.6m due within 12 months. So it can boast HK$1.75b more liquid assets than total liabilities.

This surplus liquidity suggests that Greater Bay Area Dynamic Growth Holding's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Greater Bay Area Dynamic Growth Holding has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Greater Bay Area Dynamic Growth Holding 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.

In the last year Greater Bay Area Dynamic Growth Holding wasn't profitable at an EBIT level, but managed to grow its revenue by 10%, to HK$73m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Greater Bay Area Dynamic Growth Holding?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Greater Bay Area Dynamic Growth Holding had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through HK$40m of cash and made a loss of HK$31m. While this does make the company a bit risky, it's important to remember it has net cash of HK$1.76b. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. 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. For example Greater Bay Area Dynamic Growth Holding has 2 warning signs (and 1 which can't be ignored) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.