Litu Holdings (HKG:1008) Has Debt But No Earnings; Should You Worry?

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 Litu Holdings Limited (HKG:1008) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Litu Holdings

What Is Litu Holdings's Net Debt?

As you can see below, Litu Holdings had HK$266.6m of debt at December 2022, down from HK$342.4m a year prior. But it also has HK$315.9m in cash to offset that, meaning it has HK$49.3m net cash.

How Strong Is Litu Holdings' Balance Sheet?

According to the last reported balance sheet, Litu Holdings had liabilities of HK$640.4m due within 12 months, and liabilities of HK$79.1m due beyond 12 months. Offsetting this, it had HK$315.9m in cash and HK$438.4m in receivables that were due within 12 months. So it actually has HK$34.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Litu Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Litu 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 Litu 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, Litu Holdings made a loss at the EBIT level, and saw its revenue drop to HK$984m, which is a fall of 15%. We would much prefer see growth.

So How Risky Is Litu Holdings?

Although Litu Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of HK$6.2m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. Case in point: We've spotted 4 warning signs for Litu Holdings you should be aware of, and 1 of them makes us a bit uncomfortable.

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.