Does Glory Flame Holdings (HKG:8059) use debt wisely?
Warren Buffett said: “Volatility is far from synonymous with risk. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Like many other companies Glory Flame Holdings Limited (HKG:8059) uses debt. But should shareholders worry about its use of debt?
Why is debt risky?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.
Check out our latest analysis for Glory Flame Holdings
What is Glory Flame Holdings net debt?
The graph below, which you can click on for more details, shows that Glory Flame Holdings had HK$64.3 million in debt as of December 2021; about the same as the previous year. However, he has HK$37.1 million in cash, resulting in a net debt of approximately HK$27.1 million.
How strong is Glory Flame Holdings’ balance sheet?
The latest balance sheet data shows that Glory Flame Holdings had liabilities of HK$86.2 million due within one year, and liabilities of HK$27.2 million falling due thereafter. On the other hand, it had cash of HK$37.1 million and HK$45.9 million of receivables due within one year. Thus, its liabilities total HK$30.3 million more than the combination of its cash and short-term receivables.
Given that this deficit is actually greater than the company’s market capitalization of HK$24.3 million, we think shareholders really should be watching Glory Flame Holdings’ debt levels, like a parent watching their child. riding a bike for the first time. In theory, extremely large dilution would be required if the company were forced to repay its debts by raising capital at the current share price. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in total isolation; since Glory Flame Holdings will need revenue to repay this debt. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.
Last year, Glory Flame Holdings was not profitable in terms of EBIT, but managed to increase its turnover by 22%, to HK$99 million. With a little luck, the company will be able to progress towards profitability.
While we can certainly appreciate Glory Flame Holdings’ revenue growth, its earnings before interest and tax (EBIT) loss is less than ideal. Indeed, it lost a very considerable HK$10 million in EBIT. When we look at this alongside significant liabilities, we are not particularly confident about the business. It would have to quickly improve its functioning so that we are interested in it. It’s fair to say that the loss of HK$37 million didn’t cheer us up either; we would like to see a profit. In the meantime, we consider the stock to be risky. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. To do this, you need to find out about the 2 warning signs we spotted with Glory Flame Holdings (including 1 that didn’t suit us too much).
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.