Does Greenheart Group (HKG:94) Have A Healthy Balance Sheet?

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.' 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 Greenheart Group Limited (HKG:94) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Greenheart Group

What Is Greenheart Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Greenheart Group had HK$374.6m of debt in June 2022, down from HK$403.6m, one year before. On the flip side, it has HK$98.6m in cash leading to net debt of about HK$276.1m.

How Strong Is Greenheart Group's Balance Sheet?

The latest balance sheet data shows that Greenheart Group had liabilities of HK$78.0m due within a year, and liabilities of HK$483.3m falling due after that. On the other hand, it had cash of HK$98.6m and HK$42.4m worth of receivables due within a year. So it has liabilities totalling HK$420.3m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$163.2m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Greenheart Group would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Greenheart Group 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, Greenheart Group made a loss at the EBIT level, and saw its revenue drop to HK$267m, which is a fall of 27%. That makes us nervous, to say the least.

Caveat Emptor

While Greenheart Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable HK$73m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized HK$18m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Greenheart Group (at least 1 which is concerning) , and understanding them should be part of your investment process.

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. 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.