Does RMH Holdings (HKG:8437) Have A Healthy Balance Sheet?

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.' 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 RMH Holdings Limited (HKG:8437) 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

View our latest analysis for RMH Holdings

What Is RMH Holdings's Debt?

The image below, which you can click on for greater detail, shows that at June 2021 RMH Holdings had debt of S$10.6m, up from S$2.95m in one year. On the flip side, it has S$6.55m in cash leading to net debt of about S$4.02m.

How Healthy Is RMH Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that RMH Holdings had liabilities of S$6.24m due within 12 months and liabilities of S$7.09m due beyond that. On the other hand, it had cash of S$6.55m and S$2.10m worth of receivables due within a year. So its liabilities total S$4.68m more than the combination of its cash and short-term receivables.

RMH Holdings has a market capitalization of S$23.0m, 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is RMH Holdings's earnings that will influence how the balance sheet holds up in the future. 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 RMH Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 54%, to S$11m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, RMH Holdings still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping S$8.8m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled S$4.1m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. Be aware that RMH Holdings is showing 4 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

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.