Is Global Mastermind Holdings (HKG:8063) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Global Mastermind Holdings Limited (HKG:8063) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Global Mastermind Holdings

What Is Global Mastermind Holdings's Debt?

As you can see below, Global Mastermind Holdings had HK$190.9m of debt at December 2020, down from HK$214.0m a year prior. On the flip side, it has HK$50.4m in cash leading to net debt of about HK$140.5m.

How Strong Is Global Mastermind Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Global Mastermind Holdings had liabilities of HK$250.5m due within 12 months and liabilities of HK$811.0k due beyond that. Offsetting this, it had HK$50.4m in cash and HK$217.6m in receivables that were due within 12 months. So it actually has HK$16.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Global Mastermind Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Global Mastermind Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Global Mastermind Holdings made a loss at the EBIT level, and saw its revenue drop to HK$49m, which is a fall of 34%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Global Mastermind Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable HK$177m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But a profit would do more to inspire us to research the business more closely. This one is a bit too risky for our liking. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Global Mastermind Holdings (1 is significant!) that you should be aware of before investing here.

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. 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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