Does Lotus Horizon Holdings (HKG:6063) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Lotus Horizon Holdings Limited (HKG:6063) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Lotus Horizon Holdings

How Much Debt Does Lotus Horizon Holdings Carry?

As you can see below, at the end of March 2023, Lotus Horizon Holdings had HK$28.8m of debt, up from HK$21.0m a year ago. Click the image for more detail. But it also has HK$63.3m in cash to offset that, meaning it has HK$34.5m net cash.

How Healthy Is Lotus Horizon Holdings' Balance Sheet?

We can see from the most recent balance sheet that Lotus Horizon Holdings had liabilities of HK$45.0m falling due within a year, and liabilities of HK$4.37m due beyond that. Offsetting these obligations, it had cash of HK$63.3m as well as receivables valued at HK$89.3m due within 12 months. So it can boast HK$103.2m more liquid assets than total liabilities.

This surplus liquidity suggests that Lotus Horizon Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Lotus Horizon Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Lotus Horizon 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 Lotus Horizon Holdings had a loss before interest and tax, and actually shrunk its revenue by 15%, to HK$191m. We would much prefer see growth.

So How Risky Is Lotus Horizon Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Lotus Horizon Holdings had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of HK$1.6m and booked a HK$8.1m accounting loss. Given it only has net cash of HK$34.5m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For example, we've discovered 2 warning signs for Lotus Horizon Holdings (1 is a bit concerning!) that you should be aware of before investing here.

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.