David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Greater Bay Area Investments Group Holdings Limited (HKG:261) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Greater Bay Area Investments Group Holdings Limited designs, develops, sells, and supplies telecom, electronic, and infant and child products in Mainland China, Hong Kong, North America, Asia Pacific, Europe, and internationally.
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Greater Bay Area Investments Group Holdings's Debt?
You can click the graphic below for the historical numbers, but it shows that Greater Bay Area Investments Group Holdings had HK$112.0m of debt in June 2019, down from HK$179.0m, one year before. However, its balance sheet shows it holds HK$190.0m in cash, so it actually has HK$78.0m net cash.
How Strong Is Greater Bay Area Investments Group Holdings's Balance Sheet?
The latest balance sheet data shows that Greater Bay Area Investments Group Holdings had liabilities of HK$792.0m due within a year, and liabilities of HK$51.0m falling due after that. Offsetting this, it had HK$190.0m in cash and HK$170.0m in receivables that were due within 12 months. So it has liabilities totalling HK$483.0m more than its cash and near-term receivables, combined.
Greater Bay Area Investments Group Holdings has a market capitalization of HK$1.84b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Greater Bay Area Investments Group Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Greater Bay Area Investments 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, Greater Bay Area Investments Group Holdings saw its revenue drop to HK$325m, which is a fall of 30%. That makes us nervous, to say the least.
So How Risky Is Greater Bay Area Investments Group Holdings?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Greater Bay Area Investments Group Holdings had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through HK$51m of cash and made a loss of HK$89m. But the saving grace is the HK$190m on the balance sheet. That means it could keep spending at its current rate for more than three years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow.
When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Greater Bay Area Investments Group Holdings's profit, revenue, and operating cashflow have changed over the last few years.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.