These 4 Measures Indicate That Galaxy Entertainment Group (HKG:27) Is Using Debt Safely

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Galaxy Entertainment Group Limited (HKG:27) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 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 examine debt levels, we first consider both cash and debt levels, together.

View 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 at June 2024 Galaxy Entertainment Group had debt of HK$3.91b, up from HK$2.43b in one year. But on the other hand it also has HK$20.4b in cash, leading to a HK$16.5b net cash position.

How Strong Is Galaxy Entertainment Group's Balance Sheet?

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. On the other hand, it had cash of HK$20.4b and HK$1.91b worth of receivables due within a year. 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. 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.

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 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the most recent two years, Galaxy Entertainment Group recorded free cash flow worth 61% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

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 we liked the look of last year's 1,073% year-on-year EBIT growth. So is Galaxy Entertainment Group's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Galaxy Entertainment Group has 1 warning sign we think you should be aware of.

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.