Green International Holdings (HKG:2700) Has Debt But No Earnings; Should You Worry?

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 can see that Green International Holdings Limited (HKG:2700) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Green International Holdings

What Is Green International Holdings's Debt?

The image below, which you can click on for greater detail, shows that Green International Holdings had debt of HK$24.8m at the end of June 2022, a reduction from HK$27.6m over a year. But it also has HK$104.1m in cash to offset that, meaning it has HK$79.3m net cash.

How Healthy Is Green International Holdings' Balance Sheet?

According to the last reported balance sheet, Green International Holdings had liabilities of HK$75.3m due within 12 months, and liabilities of HK$60.2m due beyond 12 months. Offsetting this, it had HK$104.1m in cash and HK$5.89m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$25.6m.

Of course, Green International Holdings has a market capitalization of HK$198.0m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Green International Holdings 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 it is Green International Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Green International Holdings had a loss before interest and tax, and actually shrunk its revenue by 20%, to HK$58m. That makes us nervous, to say the least.

So How Risky Is Green International Holdings?

While Green International Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$432k. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Green International Holdings is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.