Is Allurefem Holding (HKG:8305) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Allurefem Holding Limited (HKG:8305) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Allurefem Holding

What Is Allurefem Holding's Debt?

You can click the graphic below for the historical numbers, but it shows that Allurefem Holding had HK$28.0m of debt in June 2023, down from HK$32.3m, one year before. However, it does have HK$4.39m in cash offsetting this, leading to net debt of about HK$23.6m.

A Look At Allurefem Holding's Liabilities

The latest balance sheet data shows that Allurefem Holding had liabilities of HK$90.3m due within a year, and liabilities of HK$917.0k falling due after that. On the other hand, it had cash of HK$4.39m and HK$110.9m worth of receivables due within a year. So it actually has HK$24.1m more liquid assets than total liabilities.

This excess liquidity is a great indication that Allurefem Holding's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Allurefem Holding 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 Allurefem Holding had a loss before interest and tax, and actually shrunk its revenue by 9.4%, to HK$164m. We would much prefer see growth.

Caveat Emptor

Importantly, Allurefem Holding had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable HK$18m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd be more likely to spend time trying to understand the stock if the company made a profit. So it seems too risky for our taste. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Allurefem Holding has 3 warning signs we think you should be aware of.

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.