Grand T G Gold Holdings (HKG:8299) Has Debt But No Earnings; Should You Worry?

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 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. As with many other companies Grand T G Gold Holdings Limited (HKG:8299) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for Grand T G Gold Holdings

What Is Grand T G Gold Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Grand T G Gold Holdings had debt of HK$444.3m, up from HK$407.9m in one year. However, it also had HK$10.1m in cash, and so its net debt is HK$434.2m.

How Strong Is Grand T G Gold Holdings's Balance Sheet?

The latest balance sheet data shows that Grand T G Gold Holdings had liabilities of HK$188.9m due within a year, and liabilities of HK$394.7m falling due after that. Offsetting this, it had HK$10.1m in cash and HK$7.18m in receivables that were due within 12 months. So it has liabilities totalling HK$566.3m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the HK$41.9m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Grand T G Gold Holdings would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Grand T G Gold 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.

In the last year Grand T G Gold Holdings had a loss before interest and tax, and actually shrunk its revenue by 67%, to HK$45m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Grand T G Gold 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$41m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it burned through HK$3.1m in the last year. So we consider this a high risk stock, and we're worried its share price could sink faster than than a dingy with a great white shark attacking it. 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. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Grand T G Gold Holdings (of which 2 don't sit too well with us!) you should know about.

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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