Is Goldin Financial Holdings (HKG:530) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Goldin Financial Holdings Limited (HKG:530) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Goldin Financial Holdings

How Much Debt Does Goldin Financial Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Goldin Financial Holdings had HK$6.42b of debt in December 2020, down from HK$17.6b, one year before. However, it does have HK$6.40b in cash offsetting this, leading to net debt of about HK$15.4m.

A Look At Goldin Financial Holdings' Liabilities

We can see from the most recent balance sheet that Goldin Financial Holdings had liabilities of HK$7.60b falling due within a year, and liabilities of HK$26.6m due beyond that. Offsetting this, it had HK$6.40b in cash and HK$6.49b in receivables that were due within 12 months. So it can boast HK$5.27b more liquid assets than total liabilities.

This surplus liquidity suggests that Goldin Financial Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. But either way, Goldin Financial Holdings has virtually no net debt, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Goldin Financial 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, Goldin Financial Holdings made a loss at the EBIT level, and saw its revenue drop to HK$413m, which is a fall of 34%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Goldin Financial Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping HK$2.9b. Having said that, the balance sheet has plenty of liquid assets for now. 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. However, not all investment risk resides within the balance sheet - far from it. Be aware that Goldin Financial Holdings is showing 3 warning signs in our investment analysis , and 2 of those are potentially serious...

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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