Galaxy Entertainment Group (HKG:27) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Galaxy Entertainment Group Limited (HKG:27) makes use of debt. But the more important question is: how much risk is that debt creating?

The end of cancer? These 15 emerging AI stocks are developing tech that will allow early identification of life changing diseases like cancer and Alzheimer's.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Galaxy Entertainment Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Galaxy Entertainment Group had HK$4.26b of debt, an increase on HK$1.53b, over one year. But it also has HK$22.4b in cash to offset that, meaning it has HK$18.2b net cash.

How Healthy Is Galaxy Entertainment Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Galaxy Entertainment Group had liabilities of HK$14.8b due within 12 months and liabilities of HK$3.39b due beyond that. On the other hand, it had cash of HK$22.4b and HK$2.31b worth of receivables due within a year. So it actually has HK$6.55b more liquid assets than total liabilities.

This short term liquidity is a sign that Galaxy Entertainment Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Galaxy Entertainment Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Galaxy Entertainment Group

Another good sign is that Galaxy Entertainment Group has been able to increase its EBIT by 23% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Galaxy Entertainment Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Galaxy Entertainment Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last two years, Galaxy Entertainment Group generated free cash flow amounting to a very robust 83% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Galaxy Entertainment Group has net cash of HK$18.2b, as well as more liquid assets than liabilities. The cherry on top was that in converted 83% of that EBIT to free cash flow, bringing in HK$6.2b. So we don't think Galaxy Entertainment Group's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Galaxy Entertainment Group that you should be aware of before investing here.

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.

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

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.