Would Harbour Equine Holdings (HKG:8377) Be Better Off With Less Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Harbour Equine Holdings Limited (HKG:8377) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 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.

View our latest analysis for Harbour Equine Holdings

What Is Harbour Equine Holdings's Net Debt?

As you can see below, at the end of December 2022, Harbour Equine Holdings had HK$32.1m of debt, up from HK$5.81m a year ago. Click the image for more detail. However, because it has a cash reserve of HK$23.3m, its net debt is less, at about HK$8.76m.

How Healthy Is Harbour Equine Holdings' Balance Sheet?

According to the balance sheet data, Harbour Equine Holdings had liabilities of HK$68.6m due within 12 months, but no longer term liabilities. Offsetting these obligations, it had cash of HK$23.3m as well as receivables valued at HK$20.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$25.1m.

Given Harbour Equine Holdings has a market capitalization of HK$143.2m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, Harbour Equine Holdings reported revenue of HK$76m, which is a gain of 4.0%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Harbour Equine Holdings had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping HK$21m. 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. Another cause for caution is that is bled HK$45m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Harbour Equine Holdings has 3 warning signs (and 2 which are a bit unpleasant) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.