Is HPC Holdings (HKG:1742) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that HPC Holdings Limited (HKG:1742) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for HPC Holdings

How Much Debt Does HPC Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of October 2020 HPC Holdings had S$16.8m of debt, an increase on S$12.6m, over one year. But on the other hand it also has S$63.9m in cash, leading to a S$47.1m net cash position.

How Strong Is HPC Holdings' Balance Sheet?

The latest balance sheet data shows that HPC Holdings had liabilities of S$64.9m due within a year, and liabilities of S$17.4m falling due after that. Offsetting this, it had S$63.9m in cash and S$76.7m in receivables that were due within 12 months. So it can boast S$58.4m more liquid assets than total liabilities.

This surplus strongly suggests that HPC Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, HPC 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 you can't view debt in total isolation; since HPC Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year HPC Holdings had a loss before interest and tax, and actually shrunk its revenue by 32%, to S$147m. That makes us nervous, to say the least.

So How Risky Is HPC Holdings?

While HPC Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow S$27m. 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. There's no doubt the next few years will be crucial to how the business matures. 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. Case in point: We've spotted 3 warning signs for HPC Holdings you should be aware of, and 1 of them makes us a bit uncomfortable.

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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