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

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. We note that F8 Enterprises (Holdings) Group Limited (HKG:8347) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. 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 F8 Enterprises (Holdings) Group

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

As you can see below, F8 Enterprises (Holdings) Group had HK$45.6m of debt, at March 2023, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has HK$29.5m in cash leading to net debt of about HK$16.1m.

A Look At F8 Enterprises (Holdings) Group's Liabilities

We can see from the most recent balance sheet that F8 Enterprises (Holdings) Group had liabilities of HK$82.2m falling due within a year, and liabilities of HK$1.24m due beyond that. Offsetting these obligations, it had cash of HK$29.5m as well as receivables valued at HK$92.4m due within 12 months. So it actually has HK$38.5m more liquid assets than total liabilities.

This surplus strongly suggests that F8 Enterprises (Holdings) Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since F8 Enterprises (Holdings) Group 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, F8 Enterprises (Holdings) Group reported revenue of HK$430m, which is a gain of 20%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though F8 Enterprises (Holdings) Group managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable HK$4.2m at the EBIT level. Having said that, the balance sheet has plenty of liquid assets for now. That should give the business time to grow its cashflow. While the stock is probably a bit risky, there may be an opportunity if the business itself improves, allowing the company to stage a recovery. 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. For example F8 Enterprises (Holdings) Group has 4 warning signs (and 2 which are a bit unpleasant) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.