Is Orange Sky Golden Harvest Entertainment (Holdings) (HKG:1132) Weighed On By Its Debt Load?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Orange Sky Golden Harvest Entertainment (Holdings) Limited (HKG:1132) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

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

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

As you can see below, Orange Sky Golden Harvest Entertainment (Holdings) had HK$1.12b of debt at June 2021, down from HK$1.25b a year prior. However, it also had HK$789.8m in cash, and so its net debt is HK$334.7m.

How Strong 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$445.2m due within 12 months, and liabilities of HK$1.76b due beyond 12 months. Offsetting these obligations, it had cash of HK$789.8m as well as receivables valued at HK$148.7m due within 12 months. So it has liabilities totalling HK$1.26b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the HK$296.8m 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, Orange Sky Golden Harvest Entertainment (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 Orange Sky Golden Harvest Entertainment (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.

Over 12 months, Orange Sky Golden Harvest Entertainment (Holdings) made a loss at the EBIT level, and saw its revenue drop to HK$374m, which is a fall of 44%. To be frank that doesn't bode well.

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). Indeed, it lost a very considerable HK$239m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through HK$128m in the last year. 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. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Orange Sky Golden Harvest Entertainment (Holdings) (of which 1 is potentially serious!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.