Great Eagle Holdings (HKG: 41) has a somewhat strained balance sheet
Warren Buffett said: “Volatility is far from synonymous with risk”. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Like many other companies Great Eagle Holdings Limited (HKG: 41) uses debt. But does this debt worry shareholders?
When is debt dangerous?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first look at cash and debt levels, together.
Check out our latest review for Great Eagle Holdings
What is the net debt of Great Eagle Holdings?
As you can see below, at the end of June 2021, Great Eagle Holdings had $ 36.3 billion in debt, down from $ 31.8 billion a year ago. Click on the image for more details. However, he also had HK $ 7.50 billion in cash, so his net debt is HK $ 28.8 billion.
A look at the liabilities of Great Eagle Holdings
The latest balance sheet data shows Great Eagle Holdings had HK $ 22.0 billion in liabilities due within one year, and HK $ 23.1 billion in liabilities due thereafter. In return, he had HK $ 7.50 billion in cash and HK $ 2.55 billion in receivables due within 12 months. Thus, its liabilities exceed the sum of its cash and (short-term) receivables by HK $ 35.1 billion.
The lack here weighs heavily on the HK $ 15.7 billion business itself, as if a child struggles under the weight of a huge backpack full of books, his gym equipment and a trumpet. We therefore believe that shareholders should monitor it closely. Ultimately, Great Eagle Holdings would likely need a major recapitalization if its creditors demanded repayment.
We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
Great Eagle Holdings has a rather high debt to EBITDA ratio of 7.4, which suggests significant leverage. However, its interest coverage of 6.4 is reasonably strong, which is a good sign. Importantly, Great Eagle Holdings has increased its EBIT by 95% over the past twelve months, and this growth will make it easier to process its debt. There is no doubt that we learn the most about debt from the balance sheet. But it is the earnings of Great Eagle Holdings that will influence the performance of the balance sheet going forward. So if you want to know more about its profits, it may be worth checking out this long term profit trend chart.
Finally, a business can only repay its debts with hard cash, not with book profits. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. Over the past three years, Great Eagle Holdings has recorded free cash flow totaling 83% of its EBIT, which is higher than what we normally expected. This positions it well to repay debt if it is desirable.
Our point of view
While Great Eagle Holdings’ total liability level makes us nervous. Its conversion of EBIT to free cash flow and the growth rate of EBIT were encouraging signs. Looking at all of the angles mentioned above, it seems to us that Great Eagle Holdings is a somewhat risky investment due to its debt. Not all risks are bad, as they can increase stock price returns if they are profitable, but this risk of leverage is worth keeping in mind. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we have identified 3 warning signs for Great Eagle Holdings (2 are concerning) you should be aware of.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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