Is Galaxy Entertainment Group (HKG:27) A Risky Investment?

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.' 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 note that Galaxy Entertainment Group Limited (HKG:27) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for Galaxy Entertainment Group

What Is Galaxy Entertainment Group's Net Debt?

As you can see below, at the end of December 2022, Galaxy Entertainment Group had HK$7.58b of debt, up from HK$6.48b a year ago. Click the image for more detail. However, its balance sheet shows it holds HK$16.0b in cash, so it actually has HK$8.47b net cash.

How Strong Is Galaxy Entertainment Group's Balance Sheet?

According to the last reported balance sheet, Galaxy Entertainment Group had liabilities of HK$15.3b due within 12 months, and liabilities of HK$1.20b due beyond 12 months. Offsetting these obligations, it had cash of HK$16.0b as well as receivables valued at HK$1.23b due within 12 months. So it actually has HK$780.3m more liquid assets than total liabilities.

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$217.1b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Galaxy Entertainment Group boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Galaxy Entertainment Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Galaxy Entertainment Group had a loss before interest and tax, and actually shrunk its revenue by 41%, to HK$12b. To be frank that doesn't bode well.

So How Risky Is Galaxy Entertainment Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Galaxy Entertainment Group lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of HK$8.2b and booked a HK$3.4b accounting loss. With only HK$8.47b on the balance sheet, it would appear that its going to need to raise capital again soon. 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. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Galaxy Entertainment Group's profit, revenue, and operating cashflow have changed over the last few years.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.