Is EGL Holdings (HKG:6882) Using Debt Sensibly?

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 EGL Holdings Company Limited (HKG:6882) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for EGL Holdings

What Is EGL Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that EGL Holdings had debt of HK$605.7m at the end of June 2023, a reduction from HK$665.8m over a year. On the flip side, it has HK$290.1m in cash leading to net debt of about HK$315.6m.

How Strong Is EGL Holdings' Balance Sheet?

According to the last reported balance sheet, EGL Holdings had liabilities of HK$350.5m due within 12 months, and liabilities of HK$567.2m due beyond 12 months. Offsetting these obligations, it had cash of HK$290.1m as well as receivables valued at HK$28.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$599.5m.

This deficit casts a shadow over the HK$301.5m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, EGL Holdings would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since EGL 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.

Over 12 months, EGL Holdings reported revenue of HK$708m, which is a gain of 1,164%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

While we can certainly appreciate EGL Holdings's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at HK$3.3m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of HK$247m and the profit of HK$3.2m. So there is definitely a chance that it can improve things in the next few years. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for EGL Holdings (of which 1 can't be ignored!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.