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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Galaxy Entertainment Group Limited (HKG:27) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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

How Much Debt Does Galaxy Entertainment Group Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Galaxy Entertainment Group had debt of HK$3.91b, up from HK$2.43b in one year. However, its balance sheet shows it holds HK$20.4b in cash, so it actually has HK$16.5b net cash.

A Look At Galaxy Entertainment Group's Liabilities

According to the last reported balance sheet, Galaxy Entertainment Group had liabilities of HK$13.9b due within 12 months, and liabilities of HK$3.39b due beyond 12 months. Offsetting these obligations, it had cash of HK$20.4b as well as receivables valued at HK$1.91b due within 12 months. So it actually has HK$5.01b 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!

Better yet, Galaxy Entertainment Group grew its EBIT by 1,073% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Galaxy Entertainment Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent two years, Galaxy Entertainment Group recorded free cash flow of 49% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying 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$16.5b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 1,073% over the last year. So we don't think Galaxy Entertainment Group's use of debt is risky. Given Galaxy Entertainment Group has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

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.