Is Fameglow Holdings (HKG:8603) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Fameglow Holdings Limited (HKG:8603) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Fameglow Holdings

How Much Debt Does Fameglow Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Fameglow Holdings had HK$14.3m of debt in March 2022, down from HK$17.6m, one year before. However, it does have HK$19.1m in cash offsetting this, leading to net cash of HK$4.84m.

A Look At Fameglow Holdings' Liabilities

We can see from the most recent balance sheet that Fameglow Holdings had liabilities of HK$156.6m falling due within a year, and liabilities of HK$59.9m due beyond that. Offsetting this, it had HK$19.1m in cash and HK$4.94m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$192.5m.

This deficit isn't so bad because Fameglow Holdings is worth HK$560.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Fameglow Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Fameglow 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, Fameglow Holdings reported revenue of HK$180m, which is a gain of 119%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is Fameglow Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Fameglow Holdings lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of HK$9.7m and booked a HK$8.8m accounting loss. With only HK$4.84m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, Fameglow Holdings's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. When analysing debt levels, the balance sheet is the obvious place to start. 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 Fameglow Holdings (of which 1 can't be ignored!) 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.