Is Emperor Entertainment Hotel (HKG:296) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Emperor Entertainment Hotel Limited (HKG:296) does carry debt. But the more important question is: how much risk is that debt creating?

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Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is Emperor Entertainment Hotel's Debt?

As you can see below, Emperor Entertainment Hotel had HK$39.5m of debt, at September 2025, which is about the same as the year before. You can click the chart for greater detail. However, it does have HK$532.0m in cash offsetting this, leading to net cash of HK$492.5m.

A Look At Emperor Entertainment Hotel's Liabilities

Zooming in on the latest balance sheet data, we can see that Emperor Entertainment Hotel had liabilities of HK$247.5m due within 12 months and liabilities of HK$90.2m due beyond that. Offsetting this, it had HK$532.0m in cash and HK$46.3m in receivables that were due within 12 months. So it can boast HK$240.6m more liquid assets than total liabilities.

This luscious liquidity implies that Emperor Entertainment Hotel's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Emperor Entertainment Hotel has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Emperor Entertainment Hotel

The modesty of its debt load may become crucial for Emperor Entertainment Hotel if management cannot prevent a repeat of the 82% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Emperor Entertainment Hotel'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Emperor Entertainment Hotel has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, Emperor Entertainment Hotel actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Emperor Entertainment Hotel has net cash of HK$492.5m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of HK$68m, being 487% of its EBIT. So is Emperor Entertainment Hotel's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Emperor Entertainment Hotel .

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.