We Think Progressive Path Group Holdings (HKG:1581) Has A Fair Chunk Of Debt

Warren Buffett famously said, '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. We note that Progressive Path Group Holdings Limited (HKG:1581) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Progressive Path Group Holdings

What Is Progressive Path Group Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2021 Progressive Path Group Holdings had debt of HK$40.6m, up from HK$26.9m in one year. However, it does have HK$22.2m in cash offsetting this, leading to net debt of about HK$18.4m.

How Strong 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$155.9m due within 12 months and liabilities of HK$41.8m due beyond that. Offsetting these obligations, it had cash of HK$22.2m as well as receivables valued at HK$200.8m due within 12 months. So it actually has HK$25.2m more liquid assets than total liabilities.

This surplus suggests that Progressive Path Group Holdings is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Progressive Path Group Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 40%, to HK$436m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Progressive Path Group Holdings managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at HK$9.0m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. And on top of that, it booked free cash flow of HK$17m and profit of HK$3.7m over the last year. So it seems too risky for our taste. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Progressive Path Group Holdings is showing 4 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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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