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. 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 note that Green Leader Holdings Group Limited (HKG:61) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Green Leader Holdings Group
How Much Debt Does Green Leader Holdings Group Carry?
As you can see below, Green Leader Holdings Group had HK$5.47b of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. And it doesn't have much cash, so its net debt is about the same.
How Healthy Is Green Leader Holdings Group's Balance Sheet?
According to the last reported balance sheet, Green Leader Holdings Group had liabilities of HK$760.6m due within 12 months, and liabilities of HK$7.32b due beyond 12 months. Offsetting this, it had HK$12.9m in cash and HK$1.88m in receivables that were due within 12 months. So it has liabilities totalling HK$8.07b more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the HK$175.5m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet." So we'd watch its balance sheet closely, without a doubt At the end of the day, Green Leader Holdings Group would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Green Leader Holdings Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.