Is Realord Group Holdings (HKG:1196) Using Too Much Debt?

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. As with many other companies Realord Group Holdings Limited (HKG:1196) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Realord Group Holdings

How Much Debt Does Realord Group Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Realord Group Holdings had HK$10.2b of debt, an increase on HK$8.99b, over one year. However, it does have HK$1.64b in cash offsetting this, leading to net debt of about HK$8.55b.

A Look At Realord Group Holdings's Liabilities

According to the last reported balance sheet, Realord Group Holdings had liabilities of HK$1.15b due within 12 months, and liabilities of HK$9.93b due beyond 12 months. Offsetting these obligations, it had cash of HK$1.64b as well as receivables valued at HK$613.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$8.84b.

Given this deficit is actually higher than the company's market capitalization of HK$6.69b, we think shareholders really should watch Realord Group Holdings's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But it is Realord Group Holdings'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.

In the last year Realord Group Holdings had a loss before interest and tax, and actually shrunk its revenue by 26%, to HK$732m. That makes us nervous, to say the least.

Caveat Emptor

While Realord Group 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 HK$55m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of HK$158m over the last twelve months. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for Realord Group Holdings you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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. 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.
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