Would Ernest Borel Holdings (HKG:1856) Be Better Off With Less Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 note that Ernest Borel Holdings Limited (HKG:1856) does have debt on its balance sheet. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Ernest Borel Holdings

What Is Ernest Borel Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2021 Ernest Borel Holdings had debt of HK$283.0m, up from HK$264.0m in one year. On the flip side, it has HK$9.36m in cash leading to net debt of about HK$273.6m.

A Look At Ernest Borel Holdings' Liabilities

According to the last reported balance sheet, Ernest Borel Holdings had liabilities of HK$324.5m due within 12 months, and liabilities of HK$30.1m due beyond 12 months. Offsetting this, it had HK$9.36m in cash and HK$40.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$305.2m.

This deficit isn't so bad because Ernest Borel Holdings is worth HK$903.3m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Ernest Borel 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 Ernest Borel Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to HK$149m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Ernest Borel Holdings still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost HK$21m 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. However, it doesn't help that it burned through HK$4.0m of cash over the last year. So to be blunt we think it is risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Ernest Borel Holdings's profit, revenue, and operating cashflow have changed over the last few years.

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.