Is Fameglow Holdings (HKG:8603) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Fameglow Holdings Limited (HKG:8603) makes use of debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Fameglow Holdings

What Is Fameglow Holdings's Net Debt?

As you can see below, Fameglow Holdings had HK$15.5m of debt, at September 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have HK$30.2m in cash offsetting this, leading to net cash of HK$14.7m.

A Look At Fameglow Holdings' Liabilities

We can see from the most recent balance sheet that Fameglow Holdings had liabilities of HK$173.3m falling due within a year, and liabilities of HK$48.3m due beyond that. Offsetting this, it had HK$30.2m in cash and HK$8.04m in receivables that were due within 12 months. So it has liabilities totalling HK$183.3m more than its cash and near-term receivables, combined.

Fameglow Holdings has a market capitalization of HK$320.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Fameglow 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.

In the last year Fameglow Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 4.4%, to HK$165m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Fameglow Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Fameglow Holdings had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through HK$2.4m of cash and made a loss of HK$17m. Given it only has net cash of HK$14.7m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Be aware that Fameglow Holdings is showing 3 warning signs in our investment analysis , and 2 of those don't sit too well with us...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.