Is Galaxy Entertainment Group (HKG:27) Using Too Much 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.' 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 A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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

How Much Debt Does Galaxy Entertainment Group Carry?

As you can see below, Galaxy Entertainment Group had HK$1.53b of debt at December 2023, down from HK$7.58b a year prior. But on the other hand it also has HK$17.1b in cash, leading to a HK$15.6b net cash position.

How Healthy Is Galaxy Entertainment Group's Balance Sheet?

The latest balance sheet data shows that Galaxy Entertainment Group had liabilities of HK$12.5b due within a year, and liabilities of HK$3.47b falling due after that. Offsetting this, it had HK$17.1b in cash and HK$1.71b in receivables that were due within 12 months. So it can boast HK$2.85b 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 while it's hard to imagine that the HK$178.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Galaxy Entertainment Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Galaxy Entertainment Group made a loss at the EBIT level, last year, it was also good to see that it generated HK$6.3b in EBIT over the last twelve months. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. During the last year, Galaxy Entertainment Group burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Galaxy Entertainment Group has HK$15.6b in net cash and a decent-looking balance sheet. So we are not troubled with Galaxy Entertainment Group's debt use. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Galaxy Entertainment Group insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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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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.