Stock Analysis

Does Royal Century Resources Holdings (HKG:8125) Have A Healthy Balance Sheet?

SEHK:8125
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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 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. As with many other companies Royal Century Resources Holdings Limited (HKG:8125) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Royal Century Resources Holdings

What Is Royal Century Resources Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Royal Century Resources Holdings had HK$15.4m of debt, an increase on HK$13.6m, over one year. However, it also had HK$8.06m in cash, and so its net debt is HK$7.30m.

debt-equity-history-analysis
SEHK:8125 Debt to Equity History September 8th 2022

How Strong Is Royal Century Resources Holdings' Balance Sheet?

The latest balance sheet data shows that Royal Century Resources Holdings had liabilities of HK$19.9m due within a year, and liabilities of HK$9.91m falling due after that. On the other hand, it had cash of HK$8.06m and HK$24.8m worth of receivables due within a year. So it actually has HK$3.03m more liquid assets than total liabilities.

This short term liquidity is a sign that Royal Century Resources Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. There's no doubt that we learn most about debt from the balance sheet. But it is Royal Century Resources 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 Royal Century Resources Holdings had a loss before interest and tax, and actually shrunk its revenue by 21%, to HK$53m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Royal Century Resources Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping HK$23m. 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 want to see some positive free cashflow before spending much time on trying to understand the stock. 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. We've identified 3 warning signs with Royal Century Resources Holdings (at least 2 which shouldn't be ignored) , and understanding them should be part of your investment process.

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.