These 4 Measures Indicate That Global Link Communications Holdings (HKG:8060) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 can see that Global Link Communications Holdings Limited (HKG:8060) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Global Link Communications Holdings

What Is Global Link Communications Holdings's Debt?

The image below, which you can click on for greater detail, shows that at March 2021 Global Link Communications Holdings had debt of HK$14.2m, up from HK$3.69m in one year. But on the other hand it also has HK$106.8m in cash, leading to a HK$92.5m net cash position.

How Healthy Is Global Link Communications Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Global Link Communications Holdings had liabilities of HK$63.4m due within 12 months and liabilities of HK$412.0k due beyond that. Offsetting this, it had HK$106.8m in cash and HK$67.6m in receivables that were due within 12 months. So it actually has HK$110.5m 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. On this view, lenders should feel as safe as the beloved of a black-belt karate master. 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.

Although Global Link Communications Holdings made a loss at the EBIT level, last year, it was also good to see that it generated HK$463k in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Global Link Communications Holdings'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Global Link Communications Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Global Link Communications Holdings saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While we empathize with investors who find debt concerning, the bottom line is that Global Link Communications Holdings has net cash of HK$92.5m and plenty of liquid assets. So we don't have any problem with Global Link Communications Holdings's use of debt. 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 3 warning signs with Global Link Communications Holdings (at least 1 which is significant) , 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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