Is F8 Enterprises (Holdings) Group (HKG:8347) 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies F8 Enterprises (Holdings) Group Limited (HKG:8347) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for F8 Enterprises (Holdings) Group

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

You can click the graphic below for the historical numbers, but it shows that as of September 2021 F8 Enterprises (Holdings) Group had HK$39.8m of debt, an increase on HK$31.6m, over one year. However, it does have HK$11.7m in cash offsetting this, leading to net debt of about HK$28.1m.

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

The latest balance sheet data shows that F8 Enterprises (Holdings) Group had liabilities of HK$88.7m due within a year, and liabilities of HK$451.0k falling due after that. Offsetting this, it had HK$11.7m in cash and HK$90.8m in receivables that were due within 12 months. So it actually has HK$13.4m more liquid assets than total liabilities.

This luscious liquidity implies that F8 Enterprises (Holdings) Group's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. 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 made a loss at the EBIT level, and saw its revenue drop to HK$382m, which is a fall of 18%. That's not what we would hope to see.

Caveat Emptor

Not only did F8 Enterprises (Holdings) Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at HK$535k. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd be more likely to spend time trying to understand the stock if the company made a profit. So it seems too risky for our taste. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example F8 Enterprises (Holdings) Group has 5 warning signs (and 2 which make us uncomfortable) we think 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.