Is Arrail Group (HKG:6639) A Risky Investment?

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 note that Arrail Group Limited (HKG:6639) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Arrail Group

How Much Debt Does Arrail Group Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Arrail Group had debt of CN¥284.7m, up from CN¥159.6m in one year. However, it does have CN¥1.08b in cash offsetting this, leading to net cash of CN¥797.7m.

A Look At Arrail Group's Liabilities

According to the last reported balance sheet, Arrail Group had liabilities of CN¥750.1m due within 12 months, and liabilities of CN¥672.8m due beyond 12 months. Offsetting this, it had CN¥1.08b in cash and CN¥273.0m in receivables that were due within 12 months. So its liabilities total CN¥67.5m more than the combination of its cash and short-term receivables.

Of course, Arrail Group has a market capitalization of CN¥3.17b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Arrail Group also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Arrail Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Arrail Group wasn't profitable at an EBIT level, but managed to grow its revenue by 2.2%, to CN¥1.6b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Arrail Group?

While Arrail Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥49m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Arrail Group .

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.

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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.