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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Great Harvest Maeta Group Holdings Limited (HKG:3683) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. 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.
What Is Great Harvest Maeta Group Holdings's Debt?
The image below, which you can click on for greater detail, shows that at September 2020 Great Harvest Maeta Group Holdings had debt of US$79.3m, up from US$72.8m in one year. Net debt is about the same, since the it doesn't have much cash.
How Strong Is Great Harvest Maeta Group Holdings' Balance Sheet?
The latest balance sheet data shows that Great Harvest Maeta Group Holdings had liabilities of US$70.0m due within a year, and liabilities of US$33.5m falling due after that. Offsetting this, it had US$525.0k in cash and US$1.15m in receivables that were due within 12 months. So it has liabilities totalling US$101.9m more than its cash and near-term receivables, combined.
This is a mountain of leverage relative to its market capitalization of US$112.9m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Great Harvest Maeta Group Holdings will need earnings to service that debt. 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, Great Harvest Maeta Group Holdings made a loss at the EBIT level, and saw its revenue drop to US$11m, which is a fall of 30%. To be frank that doesn't bode well.
Not only did Great Harvest Maeta Group Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost US$2.6m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$2.7m of cash over the last year. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Great Harvest Maeta Group Holdings that you should be aware of before investing here.
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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