Here's Why Harbour Equine Holdings (HKG:8377) Can Afford Some 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.' 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 Harbour Equine Holdings Limited (HKG:8377) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Harbour Equine Holdings

What Is Harbour Equine Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Harbour Equine Holdings had HK$26.1m of debt in June 2024, down from HK$34.5m, one year before. However, because it has a cash reserve of HK$9.46m, its net debt is less, at about HK$16.7m.

How Healthy Is Harbour Equine Holdings' Balance Sheet?

According to the last reported balance sheet, Harbour Equine Holdings had liabilities of HK$51.8m due within 12 months, and liabilities of HK$1.43m due beyond 12 months. On the other hand, it had cash of HK$9.46m and HK$17.4m worth of receivables due within a year. So its liabilities total HK$26.4m more than the combination of its cash and short-term receivables.

Harbour Equine Holdings has a market capitalization of HK$71.6m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Harbour Equine Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Harbour Equine Holdings had a loss before interest and tax, and actually shrunk its revenue by 43%, to HK$47m. That makes us nervous, to say the least.

Caveat Emptor

While Harbour Equine 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$24m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of HK$44m into a profit. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Harbour Equine Holdings (of which 2 can't be ignored!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.