Glory Health Industry (HKG:2329) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Glory Health Industry Limited (HKG:2329) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Glory Health Industry

What Is Glory Health Industry's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Glory Health Industry had CN¥21.5b of debt, an increase on CN¥20.7b, over one year. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is Glory Health Industry's Balance Sheet?

We can see from the most recent balance sheet that Glory Health Industry had liabilities of CN¥27.3b falling due within a year, and liabilities of CN¥14.5b due beyond that. Offsetting these obligations, it had cash of CN¥126.7m as well as receivables valued at CN¥6.67b due within 12 months. So its liabilities total CN¥35.1b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥273.4m 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. After all, Glory Health Industry 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 it is Glory Health Industry'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.

In the last year Glory Health Industry had a loss before interest and tax, and actually shrunk its revenue by 61%, to CN¥2.4b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Glory Health Industry's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥22m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. 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 burned through CN¥74m in the last year. So is this a high risk stock? We think so, and we'd avoid it. 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. Be aware that Glory Health Industry is showing 4 warning signs in our investment analysis , and 3 of those make us uncomfortable...

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.