Does Harbour Equine Holdings (HKG:8377) Have A Healthy Balance Sheet?

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 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 can see that Harbour Equine Holdings Limited (HKG:8377) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Harbour Equine Holdings

What Is Harbour Equine Holdings's Net Debt?

As you can see below, Harbour Equine Holdings had HK$32.9m of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has HK$17.9m in cash leading to net debt of about HK$15.0m.

How Strong Is Harbour Equine Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Harbour Equine Holdings had liabilities of HK$55.2m due within 12 months and no liabilities due beyond that. Offsetting these obligations, it had cash of HK$17.9m as well as receivables valued at HK$20.2m due within 12 months. So it has liabilities totalling HK$17.1m more than its cash and near-term receivables, combined.

Since publicly traded Harbour Equine Holdings shares are worth a total of HK$122.7m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Harbour Equine 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 Harbour Equine Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 7.7%, to HK$83m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Harbour Equine Holdings produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping HK$25m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled HK$20m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Harbour Equine Holdings (3 don't sit too well with us!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.