Health Check: How Prudently Does Progressive Path Group Holdings (HKG:1581) Use 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Progressive Path Group Holdings Limited (HKG:1581) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Progressive Path Group Holdings

How Much Debt Does Progressive Path Group Holdings Carry?

The chart below, which you can click on for greater detail, shows that Progressive Path Group Holdings had HK$77.6m in debt in March 2023; about the same as the year before. However, because it has a cash reserve of HK$35.6m, its net debt is less, at about HK$42.0m.

A Look At Progressive Path Group Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Progressive Path Group Holdings had liabilities of HK$258.1m due within 12 months and liabilities of HK$74.6m due beyond that. On the other hand, it had cash of HK$35.6m and HK$230.7m worth of receivables due within a year. So its liabilities total HK$66.4m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of HK$67.2m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 Progressive Path 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 Progressive Path Group Holdings's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Progressive Path Group Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable HK$30m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of HK$22m. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Progressive Path Group Holdings .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.