Legendary fund manager Li Lu (who Charlie Munger backed) once said, ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Fresh Express Delivery Holdings Group Co., Limited (HKG:1175) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company’s use of debt, we first look at cash and debt together.
How Much Debt Does Fresh Express Delivery Holdings Group Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2019 Fresh Express Delivery Holdings Group had CN¥88.8m of debt, an increase on CN¥53.0m, over one year. However, because it has a cash reserve of CN¥12.9m, its net debt is less, at about CN¥75.9m.
A Look At Fresh Express Delivery Holdings Group’s Liabilities
Zooming in on the latest balance sheet data, we can see that Fresh Express Delivery Holdings Group had liabilities of CN¥119.6m due within 12 months and liabilities of CN¥2.76m due beyond that. Offsetting these obligations, it had cash of CN¥12.9m as well as receivables valued at CN¥24.6m due within 12 months. So it has liabilities totalling CN¥84.8m more than its cash and near-term receivables, combined.
This is a mountain of leverage relative to its market capitalization of CN¥125.8m. This suggests shareholders would heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. 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.
Over 12 months, Fresh Express Delivery Holdings Group reported revenue of CN¥1.5b, which is a gain of 221%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that’s like nailing the game winning 3-pointer!
While we can certainly savour Fresh Express Delivery Holdings Group’s tasty revenue growth, its negative earnings before interest and tax (EBIT) leaves a bitter aftertaste. Indeed, it lost a very considerable CN¥46m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥62m in negative free cash flow over the last twelve months. So in short it’s a really risky stock. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we’re providing readers this interactive graph showing how Fresh Express Delivery Holdings Group’s profit, revenue, and operating cashflow have changed over the last few years.
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.
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.
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. Thank you for reading.