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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Global Mastermind Holdings Limited (HKG:8063) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 Global Mastermind Holdings

What Is Global Mastermind Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Global Mastermind Holdings had debt of HK$115.3m at the end of June 2021, a reduction from HK$208.0m over a year. However, it does have HK$65.4m in cash offsetting this, leading to net debt of about HK$49.9m.

How Strong Is Global Mastermind Holdings' Balance Sheet?

The latest balance sheet data shows that Global Mastermind Holdings had liabilities of HK$172.3m due within a year, and liabilities of HK$7.66m falling due after that. Offsetting this, it had HK$65.4m in cash and HK$250.3m in receivables that were due within 12 months. So it can boast HK$135.7m more liquid assets than total liabilities.

This surplus liquidity suggests that Global Mastermind Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. The balance sheet is clearly the area to focus on when you are analysing debt. 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 reported revenue of HK$83m, which is a gain of 38%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Global Mastermind Holdings's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping HK$30m. That said, we're impressed with the strong balance sheet liquidity. That will give the company some time and space to grow and develop its business as need be. The company is risky because it will grow into the future to get to profitability and free cash flow. 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. We've identified 4 warning signs with Global Mastermind Holdings (at least 2 which make us uncomfortable) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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