Health Check: How Prudently Does Prosperous Printing (HKG:8385) Use Debt?

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. 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?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Prosperous Printing

What Is Prosperous Printing's Debt?

The chart below, which you can click on for greater detail, shows that Prosperous Printing had HK$139.3m in debt in June 2023; about the same as the year before. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is Prosperous Printing's Balance Sheet?

The latest balance sheet data shows that Prosperous Printing had liabilities of HK$210.9m due within a year, and liabilities of HK$21.6m falling due after that. Offsetting this, it had HK$2.00m in cash and HK$88.8m in receivables that were due within 12 months. So it has liabilities totalling HK$141.8m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$40.9m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Prosperous Printing would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Prosperous Printing 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 Prosperous Printing had a loss before interest and tax, and actually shrunk its revenue by 31%, to HK$173m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Prosperous Printing'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$49m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through HK$6.4m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 5 warning signs with Prosperous Printing (at least 4 which are potentially serious) , and understanding them should be part of your investment process.

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.