Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, United Food Holdings Limited (SGX:AZR) does carry debt. 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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
What Is United Food Holdings's Net Debt?
The image below, which you can click on for greater detail, shows that at March 2019 United Food Holdings had debt of CN¥10.0m, up from CN¥708.0k in one year. But on the other hand it also has CN¥73.8m in cash, leading to a CN¥63.8m net cash position.
How Strong Is United Food Holdings's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that United Food Holdings had liabilities of CN¥78.3m due within 12 months and liabilities of CN¥6.19m due beyond that. On the other hand, it had cash of CN¥73.8m and CN¥32.3m worth of receivables due within a year. So it can boast CN¥21.6m more liquid assets than total liabilities.
This surplus suggests that United Food Holdings is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that United Food Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is United Food 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, United Food Holdings reported revenue of CN¥84m, which is a gain of 121%. So its pretty obvious shareholders are hoping for more growth!
So How Risky Is United Food Holdings?
Although United Food Holdings had negative earnings before interest and tax (EBIT) over the last twelve months, it made a statutory profit of CN¥80m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Keeping in mind its 121% revenue growth over the last year, we think there's a decent chance the company is on track. There's no doubt fast top line growth can cure all manner of ills, for a stock. For riskier companies like United Food 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.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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