Would Hands Form Holdings (HKG:1920) 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.' 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. As with many other companies Hands Form Holdings Limited (HKG:1920) makes use of debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Hands Form Holdings

What Is Hands Form Holdings's Debt?

As you can see below, at the end of June 2021, Hands Form Holdings had HK$25.3m of debt, up from HK$16.0m a year ago. Click the image for more detail. However, it also had HK$8.58m in cash, and so its net debt is HK$16.7m.

How Strong Is Hands Form Holdings' Balance Sheet?

According to the last reported balance sheet, Hands Form Holdings had liabilities of HK$30.5m due within 12 months, and liabilities of HK$88.0k due beyond 12 months. Offsetting this, it had HK$8.58m in cash and HK$181.3m in receivables that were due within 12 months. So it actually has HK$159.3m more liquid assets than total liabilities.

This luscious liquidity implies that Hands Form Holdings' balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hands Form Holdings'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.

In the last year Hands Form Holdings had a loss before interest and tax, and actually shrunk its revenue by 67%, to HK$160m. To be frank that doesn't bode well.

Caveat Emptor

While Hands Form 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. Indeed, it lost a very considerable HK$30m at the EBIT level. That said, we're impressed with the strong balance sheet liquidity. That should give the business time to grow its cashflow. The company is risky because it will grow into the future to get to profitability and free cash flow. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Hands Form Holdings (of which 1 makes us a bit uncomfortable!) 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. 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.
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