Rock star Growth Puts Elife Holdings (HKG:223) In A Position To Use Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Elife Holdings Limited (HKG:223) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Elife Holdings

What Is Elife Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Elife Holdings had HK$24.7m of debt, an increase on none, over one year. However, it also had HK$12.7m in cash, and so its net debt is HK$12.0m.

How Strong Is Elife Holdings' Balance Sheet?

According to the last reported balance sheet, Elife Holdings had liabilities of HK$56.8m due within 12 months, and liabilities of HK$18.2m due beyond 12 months. Offsetting these obligations, it had cash of HK$12.7m as well as receivables valued at HK$88.0m due within 12 months. So it can boast HK$25.7m more liquid assets than total liabilities.

This luscious liquidity implies that Elife Holdings' balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Elife 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 Elife Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 83%, to HK$259m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Elife Holdings still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping HK$28m. 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. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. This one is a bit too risky for our liking. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Elife Holdings (of which 3 can't be ignored!) you should know about.

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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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.