Does Prosperous Printing (HKG:8385) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Prosperous Printing Company Limited (HKG:8385) does use debt in its business. But the more important question is: how much risk is that debt creating?

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 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Prosperous Printing

How Much Debt Does Prosperous Printing Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Prosperous Printing had HK$170.3m of debt, an increase on HK$161.2m, over one year. On the flip side, it has HK$9.56m in cash leading to net debt of about HK$160.8m.

How Strong Is Prosperous Printing's Balance Sheet?

The latest balance sheet data shows that Prosperous Printing had liabilities of HK$256.6m due within a year, and liabilities of HK$32.4m falling due after that. Offsetting this, it had HK$9.56m in cash and HK$177.1m in receivables that were due within 12 months. So it has liabilities totalling HK$102.3m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of HK$104.0m, so it does suggest shareholders should keep an eye on Prosperous Printing's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Prosperous Printing will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Prosperous Printing had a loss before interest and tax, and actually shrunk its revenue by 38%, to HK$253m. That makes us nervous, to say the least.

Caveat Emptor

While Prosperous Printing's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable HK$107m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled HK$6.6m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Prosperous Printing is showing 3 warning signs in our investment analysis , and 1 of those is potentially serious...

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. 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.
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