Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Great Harvest Maeta Holdings Limited (HKG:3683) does carry debt. But is this debt a concern to shareholders?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Great Harvest Maeta Holdings
How Much Debt Does Great Harvest Maeta Holdings Carry?
As you can see below, Great Harvest Maeta Holdings had US$62.7m of debt at March 2024, down from US$72.2m a year prior. Net debt is about the same, since the it doesn't have much cash.
How Strong Is Great Harvest Maeta Holdings' Balance Sheet?
According to the last reported balance sheet, Great Harvest Maeta Holdings had liabilities of US$68.4m due within 12 months, and liabilities of US$24.4m due beyond 12 months. Offsetting this, it had US$1.10m in cash and US$2.15m in receivables that were due within 12 months. So its liabilities total US$89.5m more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the US$17.1m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Great Harvest Maeta Holdings would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is Great Harvest Maeta Holdings's earnings that will influence how the balance sheet holds up in the future. 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 Great Harvest Maeta Holdings had a loss before interest and tax, and actually shrunk its revenue by 26%, to US$13m. To be frank that doesn't bode well.
Caveat Emptor
While Great Harvest Maeta Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable US$2.0m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of US$7.1m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. 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 Great Harvest Maeta Holdings (1 makes us a bit uncomfortable) 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.