Is Glory Mark Hi-Tech (Holdings) (HKG:8159) Weighed On By Its Debt Load?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 is this debt a concern to shareholders?

When Is Debt Dangerous?

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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

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

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

As you can see below, at the end of June 2021, Glory Mark Hi-Tech (Holdings) had HK$16.7m of debt, up from none a year ago. Click the image for more detail. However, it does have HK$54.6m in cash offsetting this, leading to net cash of HK$37.9m.

How Strong Is Glory Mark Hi-Tech (Holdings)'s Balance Sheet?

The latest balance sheet data shows that Glory Mark Hi-Tech (Holdings) had liabilities of HK$211.8m due within a year, and liabilities of HK$908.0k falling due after that. On the other hand, it had cash of HK$54.6m and HK$145.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$12.8m.

Of course, Glory Mark Hi-Tech (Holdings) has a market capitalization of HK$84.5m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Glory Mark Hi-Tech (Holdings) boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Glory Mark Hi-Tech (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 Glory Mark Hi-Tech (Holdings) had a loss before interest and tax, and actually shrunk its revenue by 8.0%, to HK$300m. We would much prefer see growth.

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

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Glory Mark Hi-Tech (Holdings) lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of HK$13m and booked a HK$4.7m accounting loss. Given it only has net cash of HK$37.9m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Glory Mark Hi-Tech (Holdings) is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.
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