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. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Fresh Express Delivery Holdings Group Co., Limited (HKG:1175) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Fresh Express Delivery Holdings Group Carry?
The image below, which you can click on for greater detail, shows that at March 2019 Fresh Express Delivery Holdings Group had debt of CN¥87.2m, up from none in one year. However, it does have CN¥4.52m in cash offsetting this, leading to net debt of about CN¥82.7m.
How Healthy Is Fresh Express Delivery Holdings Group's Balance Sheet?
According to the balance sheet data, Fresh Express Delivery Holdings Group had liabilities of CN¥99.2m due within 12 months, but no longer term liabilities. Offsetting these obligations, it had cash of CN¥4.52m as well as receivables valued at CN¥44.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥50.4m.
This deficit isn't so bad because Fresh Express Delivery Holdings Group is worth CN¥129.5m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Fresh Express Delivery Holdings Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Fresh Express Delivery Holdings Group had negative earnings before interest and tax, and actually shrunk its revenue by 81%, to CN¥185m. That makes us nervous, to say the least.
While Fresh Express Delivery Holdings 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. Indeed, it lost a very considerable CN¥54m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥62m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. For riskier companies like Fresh Express Delivery Holdings Group I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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