Is Great Harvest Maeta Group Holdings (HKG:3683) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Great Harvest Maeta Group Holdings Limited (HKG:3683) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Great Harvest Maeta Group Holdings

What Is Great Harvest Maeta Group Holdings's Debt?

As you can see below, at the end of September 2020, Great Harvest Maeta Group Holdings had US$79.3m of debt, up from US$72.8m a year ago. Click the image for more detail. And it doesn't have much cash, so its net debt is about the same.

A Look At Great Harvest Maeta Group Holdings's Liabilities

Zooming in on the latest balance sheet data, we can see that Great Harvest Maeta Group Holdings had liabilities of US$70.0m due within 12 months and liabilities of US$33.5m due beyond that. Offsetting this, it had US$525.0k in cash and US$1.15m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$101.9m.

This is a mountain of leverage relative to its market capitalization of US$142.5m. 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 it is Great Harvest Maeta Group 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, 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%. That makes us nervous, to say the least.

Caveat Emptor

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). To be specific the EBIT loss came in at US$2.3m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of US$12m. So to be blunt we do think it is risky. For riskier companies like Great Harvest Maeta Group Holdings I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

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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This article by Simply Wall St is general in nature. 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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