Is Fulum Group Holdings (HKG:1443) Using Debt In A Risky Way?

Warren Buffett famously said, '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 Fulum Group Holdings Limited (HKG:1443) makes use of debt. But should shareholders be worried about its use of debt?

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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Fulum Group Holdings

What Is Fulum Group Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Fulum Group Holdings had HK$180.0m of debt, an increase on HK$120.9m, over one year. However, it also had HK$179.3m in cash, and so its net debt is HK$726.0k.

How Healthy Is Fulum Group Holdings's Balance Sheet?

According to the last reported balance sheet, Fulum Group Holdings had liabilities of HK$775.7m due within 12 months, and liabilities of HK$388.8m due beyond 12 months. Offsetting this, it had HK$179.3m in cash and HK$36.6m in receivables that were due within 12 months. So its liabilities total HK$948.6m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$237.9m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Fulum Group Holdings would probably need a major re-capitalization if its creditors were to demand repayment. Fulum Group Holdings may have virtually no net debt, but it does have a lot of liabilities. When analysing debt levels, the balance sheet is the obvious place to start. But it is Fulum Group 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, Fulum Group Holdings made a loss at the EBIT level, and saw its revenue drop to HK$1.4b, which is a fall of 42%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Fulum Group Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping HK$325m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through HK$101m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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. To that end, you should learn about the 2 warning signs we've spotted with Fulum Group Holdings (including 1 which is is potentially serious) .

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. 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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