Is AV Promotions Holdings (HKG:8419) A Risky Investment?

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. We note that AV Promotions Holdings Limited (HKG:8419) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for AV Promotions Holdings

How Much Debt Does AV Promotions Holdings Carry?

The image below, which you can click on for greater detail, shows that AV Promotions Holdings had debt of HK$80.9m at the end of June 2024, a reduction from HK$92.4m over a year. On the flip side, it has HK$14.4m in cash leading to net debt of about HK$66.5m.

How Strong Is AV Promotions Holdings' Balance Sheet?

We can see from the most recent balance sheet that AV Promotions Holdings had liabilities of HK$135.7m falling due within a year, and liabilities of HK$31.5m due beyond that. Offsetting this, it had HK$14.4m in cash and HK$42.4m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$110.4m.

This deficit casts a shadow over the HK$22.8m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, AV Promotions Holdings would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since AV Promotions Holdings 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.

Over 12 months, AV Promotions Holdings made a loss at the EBIT level, and saw its revenue drop to HK$126m, which is a fall of 16%. That's not what we would hope to see.

Caveat Emptor

While AV Promotions Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping HK$8.9m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. 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$17m in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with AV Promotions Holdings .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.