Here's Why Global Link Communications Holdings (HKG:8060) Can Manage Its Debt Despite Losing Money

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.' 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 Global Link Communications Holdings Limited (HKG:8060) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Global Link Communications Holdings

What Is Global Link Communications Holdings's Net Debt?

The chart below, which you can click on for greater detail, shows that Global Link Communications Holdings had HK$14.3m in debt in March 2022; about the same as the year before. However, its balance sheet shows it holds HK$100.5m in cash, so it actually has HK$86.1m net cash.

A Look At Global Link Communications Holdings' Liabilities

The latest balance sheet data shows that Global Link Communications Holdings had liabilities of HK$84.4m due within a year, and liabilities of HK$310.0k falling due after that. On the other hand, it had cash of HK$100.5m and HK$74.3m worth of receivables due within a year. So it can boast HK$90.1m more liquid assets than total liabilities.

This excess liquidity is a great indication that Global Link Communications Holdings' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Global Link Communications Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Global Link Communications Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Global Link Communications Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 84%, to HK$180m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Global Link Communications Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Global Link Communications Holdings had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of HK$11m and booked a HK$21m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of HK$86.1m. That kitty means the company can keep spending for growth for at least two years, at current rates. Global Link Communications Holdings's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Global Link Communications Holdings , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.