Realord Group Holdings (HKG:1196) Is Carrying A Fair Bit Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Realord Group Holdings Limited (HKG:1196) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 December 2021 Realord Group Holdings had HK$11.6b of debt, an increase on HK$10.9b, over one year. However, it does have HK$310.9m in cash offsetting this, leading to net debt of about HK$11.3b.

How Strong Is Realord Group Holdings' Balance Sheet?

We can see from the most recent balance sheet that Realord Group Holdings had liabilities of HK$1.08b falling due within a year, and liabilities of HK$12.4b due beyond that. Offsetting this, it had HK$310.9m in cash and HK$843.5m in receivables that were due within 12 months. So it has liabilities totalling HK$12.3b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of HK$19.6b. This suggests shareholders would be 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 you can't view debt in total isolation; since Realord Group 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 Realord Group Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 37%, to HK$1.2b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Realord Group Holdings still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at HK$67m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled HK$210m in negative free cash flow over the last twelve months. So to be blunt we think it 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. Case in point: We've spotted 4 warning signs for Realord Group Holdings you should be aware of, and 1 of them makes us a bit uncomfortable.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.