Is Good Fellow Healthcare Holdings (HKG:8143) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We can see that Good Fellow Healthcare Holdings Limited (HKG:8143) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Good Fellow Healthcare Holdings

What Is Good Fellow Healthcare Holdings's Debt?

The image below, which you can click on for greater detail, shows that at March 2021 Good Fellow Healthcare Holdings had debt of HK$14.1m, up from none in one year. However, its balance sheet shows it holds HK$44.9m in cash, so it actually has HK$30.7m net cash.

A Look At Good Fellow Healthcare Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Good Fellow Healthcare Holdings had liabilities of HK$55.3m due within 12 months and liabilities of HK$103.1m due beyond that. Offsetting these obligations, it had cash of HK$44.9m as well as receivables valued at HK$18.5m due within 12 months. So its liabilities total HK$95.0m more than the combination of its cash and short-term receivables.

Good Fellow Healthcare Holdings has a market capitalization of HK$253.8m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Good Fellow Healthcare Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Good Fellow Healthcare Holdings will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Good Fellow Healthcare Holdings had a loss before interest and tax, and actually shrunk its revenue by 63%, to HK$54m. That makes us nervous, to say the least.

So How Risky Is Good Fellow Healthcare Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Good Fellow Healthcare Holdings had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through HK$21m of cash and made a loss of HK$30m. But the saving grace is the HK$30.7m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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 Good Fellow Healthcare Holdings has 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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.
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