Health Check: How Prudently Does Orange Sky Golden Harvest Entertainment (Holdings) (HKG:1132) Use Debt?

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. We can see that Orange Sky Golden Harvest Entertainment (Holdings) Limited (HKG:1132) does use debt in its business. But is this debt a concern to shareholders?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Orange Sky Golden Harvest Entertainment (Holdings)

What Is Orange Sky Golden Harvest Entertainment (Holdings)'s Net Debt?

As you can see below, at the end of December 2020, Orange Sky Golden Harvest Entertainment (Holdings) had HK$1.21b of debt, up from HK$1.06b a year ago. Click the image for more detail. However, because it has a cash reserve of HK$985.5m, its net debt is less, at about HK$220.6m.

How Healthy Is Orange Sky Golden Harvest Entertainment (Holdings)'s Balance Sheet?

According to the last reported balance sheet, Orange Sky Golden Harvest Entertainment (Holdings) had liabilities of HK$482.2m due within 12 months, and liabilities of HK$1.79b due beyond 12 months. Offsetting this, it had HK$985.5m in cash and HK$159.8m in receivables that were due within 12 months. So its liabilities total HK$1.13b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the HK$333.2m 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. After all, Orange Sky Golden Harvest Entertainment (Holdings) 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 it is Orange Sky Golden Harvest Entertainment (Holdings)'s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Orange Sky Golden Harvest Entertainment (Holdings) made a loss at the EBIT level, and saw its revenue drop to HK$323m, which is a fall of 70%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Orange Sky Golden Harvest Entertainment (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$235m. 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 lost HK$288m in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. 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 Orange Sky Golden Harvest Entertainment (Holdings) (including 2 which can't be ignored) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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