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

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. We note that Prosperous Printing Company Limited (HKG:8385) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Prosperous Printing

What Is Prosperous Printing's Net Debt?

The image below, which you can click on for greater detail, shows that Prosperous Printing had debt of HK$144.8m at the end of June 2022, a reduction from HK$170.3m over a year. However, it also had HK$3.43m in cash, and so its net debt is HK$141.3m.

How Strong Is Prosperous Printing's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Prosperous Printing had liabilities of HK$248.4m due within 12 months and liabilities of HK$31.1m due beyond that. On the other hand, it had cash of HK$3.43m and HK$121.1m worth of receivables due within a year. So it has liabilities totalling HK$155.0m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$28.0m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Prosperous Printing would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Prosperous Printing'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, Prosperous Printing saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Prosperous Printing produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable HK$87m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost HK$98m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. 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. For instance, we've identified 3 warning signs for Prosperous Printing (2 are significant) you should be aware of.

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.