Does REM Group (Holdings) (HKG:1750) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, REM Group (Holdings) Limited (HKG:1750) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for REM Group (Holdings)

What Is REM Group (Holdings)'s Net Debt?

As you can see below, at the end of December 2022, REM Group (Holdings) had HK$15.5m of debt, up from HK$7.64m a year ago. Click the image for more detail. However, its balance sheet shows it holds HK$71.1m in cash, so it actually has HK$55.6m net cash.

How Healthy Is REM Group (Holdings)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that REM Group (Holdings) had liabilities of HK$71.5m due within 12 months and liabilities of HK$1.96m due beyond that. Offsetting these obligations, it had cash of HK$71.1m as well as receivables valued at HK$97.5m due within 12 months. So it can boast HK$95.1m more liquid assets than total liabilities.

This surplus liquidity suggests that REM Group (Holdings)'s balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that REM Group (Holdings) has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, REM Group (Holdings) turned things around in the last 12 months, delivering and EBIT of HK$4.9m. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since REM 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While REM Group (Holdings) has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, REM Group (Holdings) saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case REM Group (Holdings) has HK$55.6m in net cash and a strong balance sheet. So we don't have any problem with REM Group (Holdings)'s use of debt. 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. We've identified 2 warning signs with REM Group (Holdings) (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.