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Health Check: How Prudently Does XMH Holdings (SGX:BQF) Use Debt?

Simply Wall St

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies XMH Holdings Ltd. (SGX:BQF) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, 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.

See our latest analysis for XMH Holdings

How Much Debt Does XMH Holdings Carry?

The chart below, which you can click on for greater detail, shows that XMH Holdings had S$70.2m in debt in July 2019; about the same as the year before. However, because it has a cash reserve of S$19.8m, its net debt is less, at about S$50.3m.

SGX:BQF Historical Debt, September 16th 2019

A Look At XMH Holdings's Liabilities

Zooming in on the latest balance sheet data, we can see that XMH Holdings had liabilities of S$44.0m due within 12 months and liabilities of S$47.1m due beyond that. Offsetting these obligations, it had cash of S$19.8m as well as receivables valued at S$22.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$48.7m.

The deficiency here weighs heavily on the S$15.8m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, XMH Holdings would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is XMH Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, XMH Holdings reported revenue of S$76m, which is a gain of 11%. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, XMH Holdings had negative earnings before interest and tax (EBIT), over the last year. Its EBIT loss was a whopping S$6.0m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized S$2.4m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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 XMH Holdings insider transactions.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.