Is Great Harvest Maeta Group Holdings (HKG:3683) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Great Harvest Maeta Group Holdings

How Much Debt Does Great Harvest Maeta Group Holdings Carry?

The image below, which you can click on for greater detail, shows that at March 2021 Great Harvest Maeta Group Holdings had debt of US$80.6m, up from US$75.4m in one year. And it doesn't have much cash, so its net debt is about the same.

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$67.7m due within a year, and liabilities of US$38.1m falling due after that. Offsetting this, it had US$316.0k in cash and US$1.58m in receivables that were due within 12 months. So its liabilities total US$103.8m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$121.4m, so it does suggest shareholders should keep an eye on Great Harvest Maeta Group Holdings' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Great Harvest Maeta Group 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.

In the last year Great Harvest Maeta Group Holdings's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Great Harvest Maeta Group Holdings produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$1.1m. 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. We would feel better if it turned its trailing twelve month loss of US$3.3m into a profit. So we do think this stock is quite risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Great Harvest Maeta Group Holdings insider transactions.

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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