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

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.' 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. Importantly, Orange Sky Golden Harvest Entertainment (Holdings) Limited (HKG:1132) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

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

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

You can click the graphic below for the historical numbers, but it shows that Orange Sky Golden Harvest Entertainment (Holdings) had HK$439.4m of debt in December 2023, down from HK$508.6m, one year before. However, it also had HK$124.8m in cash, and so its net debt is HK$314.6m.

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

Zooming in on the latest balance sheet data, we can see that Orange Sky Golden Harvest Entertainment (Holdings) had liabilities of HK$554.9m due within 12 months and liabilities of HK$1.41b due beyond that. Offsetting these obligations, it had cash of HK$124.8m as well as receivables valued at HK$87.6m due within 12 months. So its liabilities total HK$1.75b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the HK$162.4m 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. 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 it is Orange Sky Golden Harvest Entertainment (Holdings)'s earnings that will influence how the balance sheet holds up in the future. 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) reported revenue of HK$800m, which is a gain of 15%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Orange Sky Golden Harvest Entertainment (Holdings) produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping HK$47m. 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. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost HK$90m 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 example Orange Sky Golden Harvest Entertainment (Holdings) has 3 warning signs (and 2 which don't sit too well with us) we think you should know about.

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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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.