Here's Why Great China Holdings (Hong Kong) (HKG:21) Has A Meaningful Debt Burden

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.' 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. We note that Great China Holdings (Hong Kong) Limited (HKG:21) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Great China Holdings (Hong Kong)'s Net Debt?

As you can see below, Great China Holdings (Hong Kong) had HK$16.8m of debt, at June 2025, which is about the same as the year before. You can click the chart for greater detail. However, it also had HK$13.7m in cash, and so its net debt is HK$3.14m.

How Strong Is Great China Holdings (Hong Kong)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Great China Holdings (Hong Kong) had liabilities of HK$1.17b due within 12 months and liabilities of HK$153.9m due beyond that. Offsetting these obligations, it had cash of HK$13.7m as well as receivables valued at HK$2.01m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$1.31b.

This deficit casts a shadow over the HK$433.3m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Great China Holdings (Hong Kong) would likely require a major re-capitalisation if it had to pay its creditors today. Great China Holdings (Hong Kong) may have virtually no net debt, but it does have a lot of liabilities.

See our latest analysis for Great China Holdings (Hong Kong)

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Great China Holdings (Hong Kong) has net debt of just 0.40 times EBITDA, indicating that it is certainly not a reckless borrower. And it boasts interest cover of 7.6 times, which is more than adequate. Although Great China Holdings (Hong Kong) made a loss at the EBIT level, last year, it was also good to see that it generated HK$7.8m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Great China Holdings (Hong Kong)'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. During the last year, Great China Holdings (Hong Kong) burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

To be frank both Great China Holdings (Hong Kong)'s conversion of EBIT to free cash flow and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But at least it's pretty decent at managing its debt, based on its EBITDA,; that's encouraging. We're quite clear that we consider Great China Holdings (Hong Kong) to be really rather risky, as a result of its balance sheet health. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Great China Holdings (Hong Kong) (1 is a bit unpleasant) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.