Is Café de Coral Holdings (HKG:341) Using Too Much 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.' 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 note that Café de Coral Holdings Limited (HKG:341) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for Café de Coral Holdings

What Is Café de Coral Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Café de Coral Holdings had debt of HK$679.3m, up from none in one year. However, its balance sheet shows it holds HK$1.23b in cash, so it actually has HK$553.5m net cash.

How Strong Is Café de Coral Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Café de Coral Holdings had liabilities of HK$1.64b due within 12 months and liabilities of HK$2.17b due beyond that. Offsetting this, it had HK$1.23b in cash and HK$243.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$2.33b.

While this might seem like a lot, it is not so bad since Café de Coral Holdings has a market capitalization of HK$9.63b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Café de Coral Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Café de Coral Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Café de Coral Holdings made a loss at the EBIT level, and saw its revenue drop to HK$6.9b, which is a fall of 19%. We would much prefer see growth.

So How Risky Is Café de Coral Holdings?

Although Café de Coral Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of HK$86m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. For instance, we've identified 2 warning signs for Café de Coral Holdings that you should be aware of.

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. 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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