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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Grand T G Gold Holdings Limited (HKG:8299) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 step when considering a company's debt levels is to consider 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?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Grand T G Gold Holdings had HK$446.8m of debt, an increase on HK$418.2m, over one year. Net debt is about the same, since the it doesn't have much cash.

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

We can see from the most recent balance sheet that Grand T G Gold Holdings had liabilities of HK$207.2m falling due within a year, and liabilities of HK$410.7m due beyond that. On the other hand, it had cash of HK$6.13m and HK$17.3m worth of receivables due within a year. So it has liabilities totalling HK$594.5m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$88.3m company, like a colossus towering over mere mortals. 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 you can't view debt in total isolation; since Grand T G Gold Holdings will need earnings to service that debt. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 43%, to HK$100m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Grand T G Gold Holdings's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost HK$2.3m 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. 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 lost HK$18m in the last year. So we're not very excited about owning this stock. Its too risky for us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example Grand T G Gold Holdings has 3 warning signs (and 1 which shouldn't be ignored) we think 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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