Is Glory Sun Financial Group (HKG:1282) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, Glory Sun Financial Group Limited (HKG:1282) does carry debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 Glory Sun Financial Group

How Much Debt Does Glory Sun Financial Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Glory Sun Financial Group had HK$13.4b of debt, an increase on HK$9.88b, over one year. However, it also had HK$2.12b in cash, and so its net debt is HK$11.3b.

How Strong Is Glory Sun Financial Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Glory Sun Financial Group had liabilities of HK$14.0b due within 12 months and liabilities of HK$8.30b due beyond that. Offsetting these obligations, it had cash of HK$2.12b as well as receivables valued at HK$1.50b due within 12 months. So it has liabilities totalling HK$18.6b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the HK$8.10b 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. At the end of the day, Glory Sun Financial Group 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 it is Glory Sun Financial Group'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.

Over 12 months, Glory Sun Financial Group made a loss at the EBIT level, and saw its revenue drop to HK$7.8b, which is a fall of 28%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Glory Sun Financial Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at HK$76m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of HK$217m. And until that time we think this is a risky stock. 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. We've identified 4 warning signs with Glory Sun Financial Group (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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.
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