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. We can see that Greattown Holdings Ltd. (SHSE:900940) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Greattown Holdings
What Is Greattown Holdings's Net Debt?
The image below, which you can click on for greater detail, shows that Greattown Holdings had debt of CN¥8.46b at the end of June 2022, a reduction from CN¥11.2b over a year. However, because it has a cash reserve of CN¥4.29b, its net debt is less, at about CN¥4.17b.
SHSE:900940 Debt to Equity History September 29th 2022A Look At Greattown Holdings' Liabilities
The latest balance sheet data shows that Greattown Holdings had liabilities of CN¥20.0b due within a year, and liabilities of CN¥6.19b falling due after that. Offsetting these obligations, it had cash of CN¥4.29b as well as receivables valued at CN¥848.7m due within 12 months. So it has liabilities totalling CN¥21.0b more than its cash and near-term receivables, combined.
This deficit casts a shadow over the CN¥7.38b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Greattown Holdings would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Greattown Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Greattown Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥5.5b, which is a fall of 52%. To be frank that doesn't bode well.
Caveat Emptor
Not only did Greattown 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 CN¥440m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of CN¥623m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. 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. We've identified 2 warning signs with Greattown Holdings (at least 1 which can't be ignored) , and understanding them should be part of your investment process.
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.
