Is Grand Field Group Holdings (HKG:115) Using Debt In A Risky Way?

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 Grand Field Group Holdings Limited (HKG:115) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Grand Field Group Holdings

How Much Debt Does Grand Field Group Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Grand Field Group Holdings had HK$758.7m of debt, an increase on HK$684.3m, over one year. However, because it has a cash reserve of HK$59.3m, its net debt is less, at about HK$699.4m.

How Strong Is Grand Field Group Holdings' Balance Sheet?

We can see from the most recent balance sheet that Grand Field Group Holdings had liabilities of HK$807.7m falling due within a year, and liabilities of HK$863.3m due beyond that. Offsetting these obligations, it had cash of HK$59.3m as well as receivables valued at HK$55.1m due within 12 months. So it has liabilities totalling HK$1.56b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$67.4m 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, Grand Field Group Holdings would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Grand Field Group 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 Grand Field Group Holdings had a loss before interest and tax, and actually shrunk its revenue by 67%, to HK$465m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Grand Field Group Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping HK$73m. 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 lost HK$549m in the last year. So we're not very excited about owning this stock. Its too risky for us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with Grand Field Group Holdings .

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.