Is Orange Sky Golden Harvest Entertainment (Holdings) (HKG:1132) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Orange Sky Golden Harvest Entertainment (Holdings) Limited (HKG:1132) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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, Orange Sky Golden Harvest Entertainment (Holdings) had HK$483.8m of debt at June 2023, down from HK$764.9m a year prior. However, it also had HK$184.3m in cash, and so its net debt is HK$299.4m.

A Look At Orange Sky Golden Harvest Entertainment (Holdings)'s Liabilities

Zooming in on the latest balance sheet data, we can see that Orange Sky Golden Harvest Entertainment (Holdings) had liabilities of HK$916.6m due within 12 months and liabilities of HK$1.06b due beyond that. On the other hand, it had cash of HK$184.3m and HK$121.9m worth of receivables due within a year. So its liabilities total HK$1.67b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$148.4m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Orange Sky Golden Harvest Entertainment (Holdings) would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Orange Sky Golden Harvest Entertainment (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, Orange Sky Golden Harvest Entertainment (Holdings) reported revenue of HK$764m, which is a gain of 17%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Orange Sky Golden Harvest Entertainment (Holdings) had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping HK$55m. 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$60m in the last year. So we're not very excited about owning this stock. Its too risky for us. 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. For instance, we've identified 2 warning signs for Orange Sky Golden Harvest Entertainment (Holdings) (1 is significant) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.