We Think Leeport (Holdings) (HKG:387) 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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Leeport (Holdings) Limited (HKG:387) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out 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 at June 2022 Leeport (Holdings) had debt of HK$234.5m, up from HK$155.1m in one year. However, because it has a cash reserve of HK$126.6m, its net debt is less, at about HK$107.9m.

A Look At Leeport (Holdings)'s Liabilities

Zooming in on the latest balance sheet data, we can see that Leeport (Holdings) had liabilities of HK$525.1m due within 12 months and liabilities of HK$31.9m due beyond that. Offsetting these obligations, it had cash of HK$126.6m as well as receivables valued at HK$284.7m due within 12 months. So its liabilities total HK$145.7m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of HK$211.7m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Leeport (Holdings)'s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Leeport (Holdings) reported revenue of HK$708m, which is a gain of 4.9%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Leeport (Holdings) had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost HK$9.6m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through HK$69m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Leeport (Holdings) (1 is potentially serious!) that you should be aware of before investing here.

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.