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'. 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. As with many other companies Green International Holdings Limited (HKG:2700) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Green International Holdings

How Much Debt Does Green International Holdings Carry?

As you can see below, Green International Holdings had HK$84.9m of debt at December 2019, down from HK$111.7m a year prior. However, its balance sheet shows it holds HK$135.0m in cash, so it actually has HK$50.1m net cash.

How Strong Is Green International Holdings's Balance Sheet?

The latest balance sheet data shows that Green International Holdings had liabilities of HK$146.6m due within a year, and liabilities of HK$60.1m falling due after that. Offsetting these obligations, it had cash of HK$135.0m as well as receivables valued at HK$18.9m due within 12 months. So it has liabilities totalling HK$52.8m more than its cash and near-term receivables, combined.

Of course, Green International Holdings has a market capitalization of HK$290.4m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Green International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Green International Holdings will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Green International Holdings had negative earnings before interest and tax, and actually shrunk its revenue by 4.2%, to HK$79m. That's not what we would hope to see.

So How Risky Is Green International Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Green International Holdings had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through HK$22m of cash and made a loss of HK$148m. But the saving grace is the HK$50.1m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Green International Holdings (1 is a bit concerning) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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. Thank you for reading.