Does F8 Enterprises (Holdings) Group (HKG:8347) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that F8 Enterprises (Holdings) Group Limited (HKG:8347) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 F8 Enterprises (Holdings) Group

What Is F8 Enterprises (Holdings) Group's Debt?

As you can see below, at the end of March 2022, F8 Enterprises (Holdings) Group had HK$43.9m of debt, up from HK$30.1m a year ago. Click the image for more detail. On the flip side, it has HK$14.3m in cash leading to net debt of about HK$29.6m.

How Healthy Is F8 Enterprises (Holdings) Group's Balance Sheet?

We can see from the most recent balance sheet that F8 Enterprises (Holdings) Group had liabilities of HK$85.3m falling due within a year, and liabilities of HK$468.0k due beyond that. Offsetting this, it had HK$14.3m in cash and HK$98.0m in receivables that were due within 12 months. So it actually has HK$26.5m more liquid assets than total liabilities.

This excess liquidity is a great indication that F8 Enterprises (Holdings) Group's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. There's no doubt that we learn most about debt from the balance sheet. But it is F8 Enterprises (Holdings) Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, F8 Enterprises (Holdings) Group made a loss at the EBIT level, and saw its revenue drop to HK$357m, which is a fall of 18%. We would much prefer see growth.

Caveat Emptor

While F8 Enterprises (Holdings) Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable HK$20m at the EBIT level. That said, we're impressed with the strong balance sheet liquidity. That should give the business time to grow its cashflow. The company is risky because it will grow into the future to get to profitability and free cash flow. 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 F8 Enterprises (Holdings) Group (of which 2 are potentially serious!) you should know about.

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. 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.