We Think Hands Form Holdings (HKG:1920) Has A Fair Chunk Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Hands Form Holdings Limited (HKG:1920) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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.

View our latest analysis for Hands Form Holdings

What Is Hands Form Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Hands Form Holdings had HK$17.8m of debt, an increase on HK$3.82m, over one year. On the flip side, it has HK$5.95m in cash leading to net debt of about HK$11.9m.

How Healthy Is Hands Form Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hands Form Holdings had liabilities of HK$24.6m due within 12 months and liabilities of HK$122.0k due beyond that. Offsetting these obligations, it had cash of HK$5.95m as well as receivables valued at HK$189.8m due within 12 months. So it can boast HK$171.0m more liquid assets than total liabilities.

This surplus strongly suggests that Hands Form Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Hands Form 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 Hands Form Holdings had a loss before interest and tax, and actually shrunk its revenue by 45%, to HK$305m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Hands Form Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost HK$6.1m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. So it seems too risky for our taste. 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. Be aware that Hands Form Holdings is showing 4 warning signs in our investment analysis , you should know about...

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. 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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