Orange Sky Golden Harvest Entertainment (Holdings) (HKG:1132) Has Debt But No Earnings; Should You Worry?

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 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?

Why Does Debt Bring Risk?

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. 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. The first thing to do when considering how much debt a business uses is to look at 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 Debt?

You can click the graphic below for the historical numbers, but it shows that Orange Sky Golden Harvest Entertainment (Holdings) had HK$483.8m of debt in June 2023, down from HK$764.9m, one year before. However, it does have HK$184.3m in cash offsetting this, leading to net debt of about 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.

The deficiency here weighs heavily on the HK$114.8m 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. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Orange Sky Golden Harvest Entertainment (Holdings) wasn't profitable at an EBIT level, but managed to grow its revenue by 17%, to HK$764m. We usually like to see faster growth from unprofitable companies, but each to their own.

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$54m. 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 think buying this stock is risky. 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. To that end, you should learn about the 2 warning signs we've spotted with Orange Sky Golden Harvest Entertainment (Holdings) (including 1 which doesn't sit too well with us) .

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.