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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Glory Sun Financial Group Limited (HKG:1282) makes use of debt. But should shareholders be worried about its use of debt?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Glory Sun Financial Group
What Is Glory Sun Financial Group's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Glory Sun Financial Group had HK$9.89b of debt, an increase on HK$2.02b, over one year. However, it does have HK$2.72b in cash offsetting this, leading to net debt of about HK$7.17b.
How Healthy Is Glory Sun Financial Group's Balance Sheet?
We can see from the most recent balance sheet that Glory Sun Financial Group had liabilities of HK$12.6b falling due within a year, and liabilities of HK$4.09b due beyond that. On the other hand, it had cash of HK$2.72b and HK$1.55b worth of receivables due within a year. So its liabilities total HK$12.4b more than the combination of its cash and short-term receivables.
When you consider that this deficiency exceeds the company's HK$9.04b market capitalization, you might well be inclined to review the balance sheet, just like one might study a new partner's social media. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Glory Sun Financial 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.