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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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Glorious Sun Enterprises Limited (HKG:393) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Glorious Sun Enterprises
What Is Glorious Sun Enterprises's Debt?
The image below, which you can click on for greater detail, shows that Glorious Sun Enterprises had debt of HK$28.0m at the end of June 2019, a reduction from HK$565.8m over a year. But it also has HK$853.4m in cash to offset that, meaning it has HK$825.4m net cash.
How Healthy Is Glorious Sun Enterprises's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Glorious Sun Enterprises had liabilities of HK$427.8m due within 12 months and liabilities of HK$31.2m due beyond that. On the other hand, it had cash of HK$853.4m and HK$216.9m worth of receivables due within a year. So it can boast HK$611.3m more liquid assets than total liabilities.
This luscious liquidity implies that Glorious Sun Enterprises's balance sheet is sturdy like a giant sequoia tree. On this view, it seems its balance sheet is as strong as a black-belt karate master. Simply put, the fact that Glorious Sun Enterprises has more cash than debt is arguably a good indication that it can manage its debt safely.
Even more impressive was the fact that Glorious Sun Enterprises grew its EBIT by 152% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Glorious Sun Enterprises'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.