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. Importantly, Galaxy Entertainment Group Limited (HKG:27) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Galaxy Entertainment Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Galaxy Entertainment Group had HK$1.53b of debt in December 2023, down from HK$7.58b, one year before. However, its balance sheet shows it holds HK$17.1b in cash, so it actually has HK$15.6b net cash.

How Strong Is Galaxy Entertainment Group's Balance Sheet?

We can see from the most recent balance sheet that Galaxy Entertainment Group had liabilities of HK$12.5b falling due within a year, and liabilities of HK$3.47b due beyond that. On the other hand, it had cash of HK$17.1b and HK$1.71b worth of receivables due within a year. So it actually has HK$2.85b more liquid assets than total liabilities.

This state of affairs indicates that Galaxy Entertainment Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the HK$173.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Galaxy Entertainment Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Galaxy Entertainment Group made a loss at the EBIT level, last year, it was also good to see that it generated HK$6.3b in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Galaxy Entertainment Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Galaxy Entertainment Group saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Galaxy Entertainment Group has HK$15.6b in net cash and a decent-looking balance sheet. So we are not troubled with Galaxy Entertainment Group's debt use. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Galaxy Entertainment Group insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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.