Grown Up Group Investment Holdings (HKG:1842) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Grown Up Group Investment Holdings Limited (HKG:1842) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Net Debt?

As you can see below, at the end of December 2024, Grown Up Group Investment Holdings had HK$49.3m of debt, up from HK$37.3m a year ago. Click the image for more detail. But on the other hand it also has HK$70.9m in cash, leading to a HK$21.6m net cash position.

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

We can see from the most recent balance sheet that Grown Up Group Investment Holdings had liabilities of HK$128.7m falling due within a year, and liabilities of HK$714.0k due beyond that. Offsetting this, it had HK$70.9m in cash and HK$68.8m in receivables that were due within 12 months. So it can boast HK$10.3m more liquid assets than total liabilities.

This surplus suggests that Grown Up Group Investment Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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.

Check out our latest analysis for Grown Up Group Investment Holdings

In the last year Grown Up Group Investment Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 5.4%, to HK$307m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

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. And over the same period it saw negative free cash outflow of HK$10m and booked a HK$4.4m accounting loss. But the saving grace is the HK$21.6m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Grown Up Group Investment Holdings , and understanding them should be part of your investment process.

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.