Is Grand T G Gold Holdings (HKG:8299) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Grand T G Gold Holdings Limited (HKG:8299) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Grand T G Gold Holdings

How Much Debt Does Grand T G Gold Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Grand T G Gold Holdings had HK$444.3m of debt, an increase on HK$418.2m, over one year. However, it also had HK$10.1m in cash, and so its net debt is HK$434.2m.

How Healthy Is Grand T G Gold Holdings' Balance Sheet?

According to the last reported balance sheet, Grand T G Gold Holdings had liabilities of HK$188.9m due within 12 months, and liabilities of HK$394.7m due beyond 12 months. Offsetting this, it had HK$10.1m in cash and HK$7.18m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$566.3m.

The deficiency here weighs heavily on the HK$67.4m 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'd watch its balance sheet closely, without a doubt. At the end of the day, Grand T G Gold Holdings would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Grand T G Gold 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, Grand T G Gold Holdings made a loss at the EBIT level, and saw its revenue drop to HK$26m, which is a fall of 78%. 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$53m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Sure, the company might have a nice story about how they are going on to a brighter future. 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. 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. To that end, you should learn about the 4 warning signs we've spotted with Grand T G Gold Holdings (including 2 which are a bit unpleasant) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. 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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