Health Check: How Prudently Does Grown Up Group Investment Holdings (HKG:1842) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Grown Up Group Investment Holdings Limited (HKG:1842) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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.

View our latest analysis for Grown Up Group Investment Holdings

What Is Grown Up Group Investment Holdings's Net Debt?

As you can see below, at the end of June 2024, Grown Up Group Investment Holdings had HK$40.8m of debt, up from HK$37.4m a year ago. Click the image for more detail. But it also has HK$73.8m in cash to offset that, meaning it has HK$33.0m net cash.

A Look At Grown Up Group Investment Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Grown Up Group Investment Holdings had liabilities of HK$114.7m due within 12 months and liabilities of HK$1.81m due beyond that. Offsetting these obligations, it had cash of HK$73.8m as well as receivables valued at HK$57.2m due within 12 months. So it actually has HK$14.5m more liquid assets than total liabilities.

This surplus suggests that Grown Up Group Investment Holdings is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Grown Up Group Investment Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Grown Up Group Investment 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.

In the last year Grown Up Group Investment Holdings had a loss before interest and tax, and actually shrunk its revenue by 22%, to HK$285m. To be frank that doesn't bode well.

So How Risky Is Grown Up Group Investment Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Grown Up Group Investment Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through HK$7.0m of cash and made a loss of HK$2.0m. Given it only has net cash of HK$33.0m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Be aware that Grown Up Group Investment Holdings is showing 2 warning signs in our investment analysis , you should know about...

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.