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

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Green International Holdings Limited (HKG:2700) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Green International Holdings

What Is Green International Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Green International Holdings had HK$11.7m of debt in June 2023, down from HK$24.8m, one year before. But on the other hand it also has HK$72.3m in cash, leading to a HK$60.5m net cash position.

How Healthy Is Green International Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Green International Holdings had liabilities of HK$53.7m due within 12 months and liabilities of HK$38.5m due beyond that. Offsetting these obligations, it had cash of HK$72.3m as well as receivables valued at HK$2.77m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$17.1m.

Since publicly traded Green International Holdings shares are worth a total of HK$174.9m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Green International Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. 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 18%, to HK$47m. We would much prefer see growth.

So How Risky Is Green International Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Green International Holdings had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through HK$19m of cash and made a loss of HK$8.0m. While this does make the company a bit risky, it's important to remember it has net cash of HK$60.5m. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Green International Holdings is showing 2 warning signs 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.