Is Galaxy Entertainment Group (HKG:27) Using Debt Sensibly?

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. Importantly, Galaxy Entertainment Group Limited (HKG:27) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Galaxy Entertainment Group

What Is Galaxy Entertainment Group's Debt?

The image below, which you can click on for greater detail, shows that Galaxy Entertainment Group had debt of HK$8.79b at the end of June 2022, a reduction from HK$11.5b over a year. However, its balance sheet shows it holds HK$19.4b in cash, so it actually has HK$10.6b net cash.

How Strong Is Galaxy Entertainment Group's Balance Sheet?

We can see from the most recent balance sheet that Galaxy Entertainment Group had liabilities of HK$16.4b falling due within a year, and liabilities of HK$1.10b due beyond that. On the other hand, it had cash of HK$19.4b and HK$1.29b worth of receivables due within a year. So it actually has HK$3.18b 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$205.3b 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! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Galaxy Entertainment Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Galaxy Entertainment Group made a loss at the EBIT level, and saw its revenue drop to HK$16b, which is a fall of 9.8%. That's not what we would hope to see.

So How Risky Is Galaxy Entertainment Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Galaxy Entertainment Group lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through HK$8.7b of cash and made a loss of HK$471m. Given it only has net cash of HK$10.6b, the company may need to raise more capital if it doesn't reach break-even 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.

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.

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.