Health Check: How Prudently Does Greater Bay Area Dynamic Growth Holding (HKG:1189) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Greater Bay Area Dynamic Growth Holding Limited (HKG:1189) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Greater Bay Area Dynamic Growth Holding

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

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Greater Bay Area Dynamic Growth Holding had HK$22.0m of debt, an increase on none, over one year. But on the other hand it also has HK$1.81b in cash, leading to a HK$1.79b net cash position.

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

The latest balance sheet data shows that Greater Bay Area Dynamic Growth Holding had liabilities of HK$82.3m due within a year, and liabilities of HK$24.9m falling due after that. On the other hand, it had cash of HK$1.81b and HK$36.1m worth of receivables due within a year. So it actually has HK$1.74b more liquid assets than total liabilities.

This excess liquidity is a great indication that Greater Bay Area Dynamic Growth Holding's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Greater Bay Area Dynamic Growth Holding boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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 had a loss before interest and tax, and actually shrunk its revenue by 69%, to HK$67m. To be frank that doesn't bode well.

So How Risky Is Greater Bay Area Dynamic Growth Holding?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Greater Bay Area Dynamic Growth Holding lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of HK$53m and booked a HK$57m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of HK$1.79b. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Greater Bay Area Dynamic Growth Holding 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.

When trading stocks or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.