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, Progressive Path Group Holdings Limited (HKG:1581) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Progressive Path Group Holdings Carry?
You can click the graphic below for the historical numbers, but it shows that Progressive Path Group Holdings had HK$24.8m of debt in September 2020, down from HK$28.7m, one year before. However, its balance sheet shows it holds HK$26.5m in cash, so it actually has HK$1.69m net cash.
How Healthy Is Progressive Path Group Holdings' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Progressive Path Group Holdings had liabilities of HK$153.5m due within 12 months and liabilities of HK$36.8m due beyond that. Offsetting these obligations, it had cash of HK$26.5m as well as receivables valued at HK$218.4m due within 12 months. So it actually has HK$54.6m more liquid assets than total liabilities.
This surplus strongly suggests that Progressive Path Group Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Progressive Path Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Progressive Path Group 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, Progressive Path Group Holdings reported revenue of HK$391m, which is a gain of 66%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Progressive Path Group Holdings?
While Progressive Path Group Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$45m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We also take heart from the solid 66% revenue growth in 12 months; undoubtedly a good sign. That growth could mean this is one stock well worth watching. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Progressive Path Group Holdings has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.
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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