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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Grown Up Group Investment Holdings Limited (HKG:1842) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Grown Up Group Investment Holdings's Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Grown Up Group Investment Holdings had debt of HK$49.3m, up from HK$37.3m in one year. However, its balance sheet shows it holds HK$70.9m in cash, so it actually has HK$21.6m net cash.

How Healthy Is Grown Up Group Investment Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Grown Up Group Investment Holdings had liabilities of HK$128.7m due within 12 months and liabilities of HK$714.0k due beyond that. On the other hand, it had cash of HK$70.9m and HK$85.7m worth of receivables due within a year. So it actually has HK$27.2m more liquid assets than total liabilities.

This surplus strongly suggests that Grown Up Group Investment Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Grown Up Group Investment Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. 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.

Check out our latest analysis for Grown Up Group Investment Holdings

Over 12 months, Grown Up Group Investment Holdings reported revenue of HK$307m, which is a gain of 5.4%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Grown Up Group Investment Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Grown Up Group Investment Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through HK$7.0m of cash and made a loss of HK$4.4m. While this does make the company a bit risky, it's important to remember it has net cash of HK$21.6m. That means it could keep spending at its current rate for more than two years. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Grown Up Group Investment Holdings has 2 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.