Warren Buffett famously said, '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. We can see that HKBridge Financial Holdings Limited (HKG:2323) does use debt in its business. But is this debt a concern to shareholders?
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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is HKBridge Financial Holdings's Debt?
As you can see below, HKBridge Financial Holdings had HK$1.50b of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. However, it does have HK$282.4m in cash offsetting this, leading to net debt of about HK$1.22b.
How Healthy Is HKBridge Financial Holdings's Balance Sheet?
We can see from the most recent balance sheet that HKBridge Financial Holdings had liabilities of HK$2.29b falling due within a year, and liabilities of HK$27.2m due beyond that. On the other hand, it had cash of HK$282.4m and HK$2.81b worth of receivables due within a year. So it actually has HK$768.4m more liquid assets than total liabilities.
This surplus strongly suggests that HKBridge Financial Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. When analysing debt levels, the balance sheet is the obvious place to start. But it is HKBridge Financial 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.
In the last year HKBridge Financial Holdings had negative earnings before interest and tax, and actually shrunk its revenue by 61%, to HK$415m. That makes us nervous, to say the least.
While HKBridge Financial Holdings'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 HK$110m at the EBIT level. Having said that, the balance sheet has plenty of liquid assets for now. That will give the company some time and space to grow and develop its business as need be. The company is risky because it will grow into the future to get to profitability and free cash flow. For riskier companies like HKBridge Financial Holdings 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.
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 firstname.lastname@example.org. 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.