Rock star Growth Puts Global Mastermind Holdings (HKG:8063) In A Position To Use Debt

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 Global Mastermind Holdings Limited (HKG:8063) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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.

View our latest analysis for Global Mastermind Holdings

How Much Debt Does Global Mastermind Holdings Carry?

The image below, which you can click on for greater detail, shows that Global Mastermind Holdings had debt of HK$125.0m at the end of June 2021, a reduction from HK$208.0m over a year. On the flip side, it has HK$65.4m in cash leading to net debt of about HK$59.6m.

A Look At Global Mastermind Holdings' Liabilities

We can see from the most recent balance sheet that Global Mastermind Holdings had liabilities of HK$172.3m falling due within a year, and liabilities of HK$7.66m due beyond that. Offsetting these obligations, it had cash of HK$65.4m as well as receivables valued at HK$250.3m due within 12 months. So it actually has 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. When analysing debt levels, the balance sheet is the obvious place to start. 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$77m, which is a gain of 95%, 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

Even though Global Mastermind Holdings managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping HK$44m. That said, we're impressed with the strong balance sheet liquidity. That should give the business time to grow its cashflow. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Global Mastermind Holdings (2 are concerning) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.