We Think Elife Holdings (HKG:223) Has A Fair Chunk Of 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Elife Holdings Limited (HKG:223) 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Elife Holdings

What Is Elife Holdings's Net Debt?

As you can see below, Elife Holdings had HK$23.7m of debt at March 2021, down from HK$41.0m a year prior. However, because it has a cash reserve of HK$15.5m, its net debt is less, at about HK$8.18m.

How Healthy Is Elife Holdings' Balance Sheet?

According to the last reported balance sheet, Elife Holdings had liabilities of HK$35.2m due within 12 months, and liabilities of HK$18.3m due beyond 12 months. Offsetting this, it had HK$15.5m in cash and HK$43.9m in receivables that were due within 12 months. So it can boast HK$6.00m more liquid assets than total liabilities.

This surplus suggests that Elife Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Elife Holdings's earnings that will influence how the balance sheet holds up in the future. 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 404%, to HK$276m. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

While we can certainly appreciate Elife Holdings's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable HK$34m at the EBIT level. 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. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. Having said that the rate of revenue growth will likely impress the market, greatly facilitating any potential capital raising, if required. So it's risky, but with some potential. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 5 warning signs with Elife Holdings (at least 2 which are a bit concerning) , and understanding them should be part of your investment process.

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.
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