Despite Lacking Profits Dragon Rise Group Holdings (HKG:6829) Seems To Be On Top Of Its Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Dragon Rise Group Holdings Limited (HKG:6829) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

Check out our latest analysis for Dragon Rise Group Holdings

How Much Debt Does Dragon Rise Group Holdings Carry?

As you can see below, Dragon Rise Group Holdings had HK$14.8m of debt at September 2020, down from HK$20.6m a year prior. But on the other hand it also has HK$49.1m in cash, leading to a HK$34.3m net cash position.

How Strong Is Dragon Rise Group Holdings's Balance Sheet?

The latest balance sheet data shows that Dragon Rise Group Holdings had liabilities of HK$45.2m due within a year, and liabilities of HK$5.93m falling due after that. On the other hand, it had cash of HK$49.1m and HK$185.2m worth of receivables due within a year. So it actually has HK$183.2m more liquid assets than total liabilities.

This excess liquidity is a great indication that Dragon Rise Group Holdings's balance sheet is just as strong as racists are weak. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Succinctly put, Dragon Rise Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Dragon Rise Group 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.

In the last year Dragon Rise Group Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 63%, to HK$790m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Dragon Rise Group Holdings?

While Dragon Rise Group Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$8.3m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Given it also grew revenue by 63% over the last year, we think there's a good chance the company is on track. That growth could mean this is one stock well worth watching. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Dragon Rise Group Holdings has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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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