Is Glory Mark Hi-Tech (Holdings) (HKG:8159) Using Too Much Debt?

Warren Buffett famously said, '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. Importantly, Glory Mark Hi-Tech (Holdings) Limited (HKG:8159) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Glory Mark Hi-Tech (Holdings)

What Is Glory Mark Hi-Tech (Holdings)'s Debt?

As you can see below, at the end of December 2021, Glory Mark Hi-Tech (Holdings) had HK$51.7m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds HK$84.1m in cash, so it actually has HK$32.5m net cash.

A Look At Glory Mark Hi-Tech (Holdings)'s Liabilities

Zooming in on the latest balance sheet data, we can see that Glory Mark Hi-Tech (Holdings) had liabilities of HK$240.6m due within 12 months and liabilities of HK$15.6m due beyond that. On the other hand, it had cash of HK$84.1m and HK$203.3m worth of receivables due within a year. So it can boast HK$31.4m more liquid assets than total liabilities.

This surplus suggests that Glory Mark Hi-Tech (Holdings) is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Glory Mark Hi-Tech (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 it is Glory Mark Hi-Tech (Holdings)'s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Glory Mark Hi-Tech (Holdings) reported revenue of HK$351m, which is a gain of 20%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Glory Mark Hi-Tech (Holdings)?

Although Glory Mark Hi-Tech (Holdings) had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of HK$42m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. For instance, we've identified 4 warning signs for Glory Mark Hi-Tech (Holdings) (1 is significant) you should be aware of.

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.