Is Great China Holdings (Hong Kong) (HKG:21) A Risky Investment?

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.' 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. As with many other companies Great China Holdings (Hong Kong) Limited (HKG:21) makes use of debt. But is this debt a concern to shareholders?

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. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

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

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

You can click the graphic below for the historical numbers, but it shows that Great China Holdings (Hong Kong) had HK$16.8m of debt in June 2024, down from HK$22.3m, one year before. However, its balance sheet shows it holds HK$46.3m in cash, so it actually has HK$29.5m net cash.

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

We can see from the most recent balance sheet that Great China Holdings (Hong Kong) had liabilities of HK$1.23b falling due within a year, and liabilities of HK$157.3m due beyond that. Offsetting this, it had HK$46.3m in cash and HK$1.45m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$1.34b.

This deficit casts a shadow over the HK$385.6m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Great China Holdings (Hong Kong) would probably need a major re-capitalization if its creditors were to demand repayment. Great China Holdings (Hong Kong) boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Great China Holdings (Hong Kong) 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.

It seems likely shareholders hope that Great China Holdings (Hong Kong) can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

So How Risky Is Great China Holdings (Hong Kong)?

While Great China Holdings (Hong Kong) lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$102k. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Given the lack of transparency around future revenue (and cashflow), we're nervous about this one, until it makes its first big sales. To us, it is a high risk play. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Great China Holdings (Hong Kong) .

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.