Great Harvest Maeta Group Holdings (HKG:3683) Seems To Use Debt Quite Sensibly
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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Great Harvest Maeta Group Holdings Limited (HKG:3683) does use debt in its business. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Great Harvest Maeta Group Holdings
What Is Great Harvest Maeta Group Holdings's Net Debt?
As you can see below, Great Harvest Maeta Group Holdings had US$74.8m of debt at March 2019, down from US$81.2m a year prior. However, it does have US$2.60m in cash offsetting this, leading to net debt of about US$72.2m.
A Look At Great Harvest Maeta Group Holdings's Liabilities
We can see from the most recent balance sheet that Great Harvest Maeta Group Holdings had liabilities of US$18.4m falling due within a year, and liabilities of US$78.5m due beyond that. Offsetting this, it had US$2.60m in cash and US$918.0k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$93.4m.
This deficit isn't so bad because Great Harvest Maeta Group Holdings is worth US$176.1m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).