Is Leeport (Holdings) (HKG:387) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, Leeport (Holdings) Limited (HKG:387) does carry debt. 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 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Leeport (Holdings)

How Much Debt Does Leeport (Holdings) Carry?

The image below, which you can click on for greater detail, shows that Leeport (Holdings) had debt of HK$170.7m at the end of June 2020, a reduction from HK$224.3m over a year. However, because it has a cash reserve of HK$127.3m, its net debt is less, at about HK$43.4m.

How Healthy Is Leeport (Holdings)'s Balance Sheet?

We can see from the most recent balance sheet that Leeport (Holdings) had liabilities of HK$348.9m falling due within a year, and liabilities of HK$34.6m due beyond that. Offsetting these obligations, it had cash of HK$127.3m as well as receivables valued at HK$125.3m due within 12 months. So its liabilities total HK$131.0m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of HK$161.1m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Leeport (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 Leeport (Holdings) had a loss before interest and tax, and actually shrunk its revenue by 21%, to HK$603m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Leeport (Holdings)'s revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable HK$35m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled HK$35m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. For instance, we've identified 3 warning signs for Leeport (Holdings) (2 are potentially serious) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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