Is Glory Sun Financial Group (HKG:1282) A Risky Investment?

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Glory Sun Financial Group Limited (HKG:1282) makes use of debt. But should shareholders be worried about its use of debt?” data-reactid=”27″ type=”text”>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 ” data-reactid=”30″ type=”text”> 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.

SEHK:1282 Historical Debt, September 16th 2019

SEHK:1282 Historical Debt, September 16th 2019

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.

Click here for an interactive snapshot.” data-reactid=”47″ type=”text”>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.

Over 12 months, Glory Sun Financial Group saw its revenue drop to HK$2.7b, which is a fall of 21%. To be frank that doesn’t bode well.

Caveat Emptor

click here ito see our graphic depicting Glory Sun Financial Group insider transactions.” data-reactid=”50″ type=”text”>While Glory Sun Financial Group’s falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at HK$103m. When we look at that alongside the significant liabilities, we’re not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through HK$215m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Glory Sun Financial Group insider transactions.

our special list of such companies (all with a track record of profit growth). It’s free.” data-reactid=”55″ type=”text”>At the end of the day, it’s often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It’s free.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.” data-reactid=”56″ type=”text”>We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.

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