The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Galaxy Entertainment Group Limited (HKG:27) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Galaxy Entertainment Group

How Much Debt Does Galaxy Entertainment Group Carry?

You can click the graphic below for the historical numbers, but it shows that Galaxy Entertainment Group had HK$6.48b of debt in December 2021, down from HK$9.32b, one year before. However, its balance sheet shows it holds HK$21.1b in cash, so it actually has HK$14.7b net cash.

How Strong Is Galaxy Entertainment Group's Balance Sheet?

According to the last reported balance sheet, Galaxy Entertainment Group had liabilities of HK$14.9b due within 12 months, and liabilities of HK$1.30b due beyond 12 months. On the other hand, it had cash of HK$21.1b and HK$1.78b worth of receivables due within a year. So it actually has HK$6.75b more liquid assets than total liabilities.

This surplus suggests that Galaxy Entertainment Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Galaxy Entertainment Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Galaxy Entertainment Group made a loss at the EBIT level, last year, it was also good to see that it generated HK$287m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Galaxy Entertainment Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Galaxy Entertainment Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last year, Galaxy Entertainment Group burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Galaxy Entertainment Group has HK$14.7b in net cash and a decent-looking balance sheet. So we are not troubled with Galaxy Entertainment Group's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Galaxy Entertainment Group is showing 1 warning sign in our investment analysis , you should know about...

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.

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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.