Would F8 Enterprises (Holdings) Group (HKG:8347) Be Better Off With Less Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for F8 Enterprises (Holdings) Group

How Much Debt Does F8 Enterprises (Holdings) Group Carry?

The image below, which you can click on for greater detail, shows that F8 Enterprises (Holdings) Group had debt of HK$30.1m at the end of September 2022, a reduction from HK$39.8m over a year. However, because it has a cash reserve of HK$22.4m, its net debt is less, at about HK$7.61m.

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

The latest balance sheet data shows that F8 Enterprises (Holdings) Group had liabilities of HK$91.1m due within a year, and liabilities of HK$468.0k falling due after that. On the other hand, it had cash of HK$22.4m and HK$108.6m worth of receivables due within a year. So it actually has HK$39.4m more liquid assets than total liabilities.

This surplus liquidity suggests that F8 Enterprises (Holdings) Group's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. The balance sheet is clearly the area to focus on when you are analysing debt. 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 reported revenue of HK$434m, which is a gain of 47%, 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. Its EBIT loss was a whopping HK$11m. That said, we're impressed with the strong balance sheet liquidity. That will give the company some time and space to grow and develop its business as need be. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with F8 Enterprises (Holdings) Group (at least 2 which can't be ignored) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.