Financial Street Holdings (SZSE:000402) Has Debt But No Earnings; Should You Worry?

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. We can see that Financial Street Holdings Co., Ltd. (SZSE:000402) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Financial Street Holdings

How Much Debt Does Financial Street Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Financial Street Holdings had CN¥69.7b of debt in September 2024, down from CN¥76.0b, one year before. However, because it has a cash reserve of CN¥10.3b, its net debt is less, at about CN¥59.4b.

A Look At Financial Street Holdings' Liabilities

We can see from the most recent balance sheet that Financial Street Holdings had liabilities of CN¥26.0b falling due within a year, and liabilities of CN¥71.0b due beyond that. Offsetting this, it had CN¥10.3b in cash and CN¥7.45b in receivables that were due within 12 months. So it has liabilities totalling CN¥79.2b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥10.5b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Financial Street Holdings would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Financial Street Holdings will need earnings to service that debt. 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 Financial Street Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to CN¥16b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Financial Street Holdings managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping CN¥2.1b. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost CN¥3.2b in the last year. So we think buying this stock is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Financial Street Holdings that you should be aware of before investing here.

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.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.