Health Check: How Prudently Does Galaxy Entertainment Group (HKG:27) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Galaxy Entertainment Group Limited (HKG:27) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 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. 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.

View our latest analysis for Galaxy Entertainment Group

What Is Galaxy Entertainment Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Galaxy Entertainment Group had HK$9.32b of debt, an increase on HK$673.6m, over one year. However, its balance sheet shows it holds HK$18.3b in cash, so it actually has HK$9.00b net cash.

A Look At Galaxy Entertainment Group's Liabilities

We can see from the most recent balance sheet that Galaxy Entertainment Group had liabilities of HK$23.9b falling due within a year, and liabilities of HK$802.2m due beyond that. Offsetting these obligations, it had cash of HK$18.3b as well as receivables valued at HK$1.81b due within 12 months. So its liabilities total HK$4.56b more than the combination of its cash and short-term receivables.

Having regard to Galaxy Entertainment Group's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the HK$306.0b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Galaxy Entertainment Group also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, Galaxy Entertainment Group made a loss at the EBIT level, and saw its revenue drop to HK$13b, which is a fall of 75%. To be frank that doesn't bode well.

So How Risky Is Galaxy Entertainment Group?

While Galaxy Entertainment Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$4.1b. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Galaxy Entertainment Group that you should be aware of before investing here.

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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