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Is Green International Holdings (HKG:2700) Using Too Much Debt?
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Green International Holdings Limited (HKG:2700) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Green International Holdings
How Much Debt Does Green International Holdings Carry?
The chart below, which you can click on for greater detail, shows that Green International Holdings had HK$27.6m in debt in June 2021; about the same as the year before. But on the other hand it also has HK$126.6m in cash, leading to a HK$99.0m net cash position.
How Strong Is Green International Holdings' Balance Sheet?
The latest balance sheet data shows that Green International Holdings had liabilities of HK$69.6m due within a year, and liabilities of HK$74.1m falling due after that. On the other hand, it had cash of HK$126.6m and HK$8.85m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$8.30m.
Since publicly traded Green International Holdings shares are worth a total of HK$267.3m, it seems unlikely that this level of liabilities would be a major threat. 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! There's no doubt that we learn most about debt from the balance sheet. 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.
Over 12 months, Green International Holdings reported revenue of HK$72m, which is a gain of 7.1%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Green International Holdings?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Green International Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through HK$209k of cash and made a loss of HK$31m. But the saving grace is the HK$99.0m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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 Green International Holdings has 3 warning signs (and 1 which is a bit concerning) we think you should know about.
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.
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About SEHK:2700
Green International Holdings
Provides health and medical services in Hong Kong and the People’s Republic of China.
Flawless balance sheet and slightly overvalued.