Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Like many other companies Wealth Glory Holdings Limited (HKG: 8269) uses debt. But does this debt concern shareholders?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. Ultimately, if the company can’t meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.
Check out our latest review for Wealth Glory Holdings
What is the net debt of Wealth Glory Holdings?
The image below, which you can click for more details, shows Wealth Glory Holdings owed HK $ 12.6 million in debt at the end of March 2021, a reduction from HK $ 18.7 million on a year. However, his balance sheet shows that he has HK $ 28.6million in cash, so he actually has HK $ 16.0million in net cash.
A look at the liabilities of Wealth Glory Holdings
We can see from the most recent balance sheet that Wealth Glory Holdings had a liability of HK $ 30.8 million maturing within one year, and a liability of HK $ 35,000 due beyond. In return, he had HK $ 28.6 million in cash and HK $ 62.3 million in receivables due within 12 months. He can therefore boast of having HK $ 60.1 million more in liquid assets than total Liabilities.
This excess liquidity is a good indication that Wealth Glory Holdings’ balance sheet is almost as strong as that of Fort Knox. Given this fact, we believe its track record is as strong as an ox. Put simply, the fact that Wealth Glory Holdings has more cash than debt is arguably a good indication that it can safely manage its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is the earnings of Wealth Glory Holdings that will influence balance sheet performance in the future. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Over 12 months, Wealth Glory Holdings recorded a loss in EBIT level and saw its revenue fall to HK $ 51 million, a decrease of 24%. To be frank, that doesn’t bode well.
So how risky is Wealth Glory Holdings?
Statistically speaking, businesses that lose money are riskier than those that earn it. And over the past year, Wealth Glory Holdings has recorded a loss of earnings before interest and taxes (EBIT), frankly. Indeed, during this period, he spent HK $ 10million in cash and recorded a loss of HK $ 67million. With only HK $ 16.0 million on the balance sheet, it looks like capital will have to be raised again soon. Overall, its balance sheet doesn’t look too risky at the moment, but we are still cautious until we see positive free cash flow. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we have identified 2 warning signs for Wealth Glory Holdings (1 should not be ignored) you should be aware of this.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash growth net stocks today.
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