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

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. 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?

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. 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. 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. 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 Global Mastermind Holdings

What Is Global Mastermind Holdings's Net Debt?

As you can see below, Global Mastermind Holdings had HK$100.0m of debt at June 2022, down from HK$115.3m a year prior. However, because it has a cash reserve of HK$44.6m, its net debt is less, at about HK$55.4m.

A Look At Global Mastermind Holdings' Liabilities

According to the balance sheet data, Global Mastermind Holdings had liabilities of HK$135.0m due within 12 months, but no longer term liabilities. On the other hand, it had cash of HK$44.6m and HK$193.5m worth of receivables due within a year. So it can boast HK$103.1m more liquid assets than total liabilities.

This luscious liquidity implies that Global Mastermind Holdings' balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. There's no doubt that we learn most about debt from the balance sheet. But it is Global Mastermind 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, Global Mastermind Holdings made a loss at the EBIT level, and saw its revenue drop to HK$12m, which is a fall of 84%. That makes us nervous, to say the least.

Caveat Emptor

While Global Mastermind Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping HK$139m. Having said that, the balance sheet has plenty of liquid assets for now. 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Global Mastermind Holdings is showing 4 warning signs in our investment analysis , and 3 of those are concerning...

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.