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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Galaxy Entertainment Group Limited (HKG:27) does have debt on its balance sheet. But is this debt a concern to shareholders?

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When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 examine debt levels, we first consider both cash and debt levels, together.

What Is Galaxy Entertainment Group's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Galaxy Entertainment Group had debt of HK$4.26b, up from HK$1.53b in one year. However, its balance sheet shows it holds HK$22.4b in cash, so it actually has HK$18.2b net cash.

How Strong Is Galaxy Entertainment Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Galaxy Entertainment Group had liabilities of HK$14.8b due within 12 months and liabilities of HK$3.39b due beyond that. Offsetting these obligations, it had cash of HK$22.4b as well as receivables valued at HK$2.31b due within 12 months. So it can boast HK$6.54b more liquid assets than total liabilities.

This surplus suggests that Galaxy Entertainment Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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.

Check out our latest analysis for Galaxy Entertainment Group

Another good sign is that Galaxy Entertainment Group has been able to increase its EBIT by 25% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Galaxy Entertainment Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last two years, Galaxy Entertainment Group generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd expect. That puts it in a very strong position to pay 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$18.2b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of HK$6.7b, being 86% of its EBIT. So we don't think Galaxy Entertainment Group's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Galaxy Entertainment Group that you should be aware of.

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.

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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.