We Think Fameglow Holdings (HKG:8603) Can Stay On Top Of Its Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We can see that Fameglow Holdings Limited (HKG:8603) does use debt in its business. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is Fameglow Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2025 Fameglow Holdings had HK$13.0m of debt, an increase on HK$10.0m, over one year. But on the other hand it also has HK$74.4m in cash, leading to a HK$61.5m net cash position.

A Look At Fameglow Holdings' Liabilities

The latest balance sheet data shows that Fameglow Holdings had liabilities of HK$176.9m due within a year, and liabilities of HK$46.8m falling due after that. Offsetting this, it had HK$74.4m in cash and HK$47.1m in receivables that were due within 12 months. So its liabilities total HK$102.2m more than the combination of its cash and short-term receivables.

Since publicly traded Fameglow Holdings shares are worth a total of HK$1.18b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

Check out our latest analysis for Fameglow Holdings

Also positive, Fameglow Holdings grew its EBIT by 22% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Fameglow Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Fameglow Holdings produced sturdy free cash flow equating to 55% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Fameglow Holdings's liabilities, but we can be reassured by the fact it has has net cash of HK$61.5m. And we liked the look of last year's 22% year-on-year EBIT growth. So is Fameglow Holdings's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Fameglow Holdings, you may well want to click here to check an interactive graph of its earnings per share history.

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.