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

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.' 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. Importantly, RMH Holdings Limited (HKG:8437) does carry debt. But should shareholders be worried about its use of debt?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for RMH Holdings

What Is RMH Holdings's Debt?

The chart below, which you can click on for greater detail, shows that RMH Holdings had S$5.42m in debt in June 2022; about the same as the year before. But it also has S$8.87m in cash to offset that, meaning it has S$3.45m net cash.

A Look At RMH Holdings' Liabilities

We can see from the most recent balance sheet that RMH Holdings had liabilities of S$13.4m falling due within a year, and liabilities of S$6.66m due beyond that. Offsetting these obligations, it had cash of S$8.87m as well as receivables valued at S$3.60m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$7.55m.

While this might seem like a lot, it is not so bad since RMH Holdings has a market capitalization of S$23.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, RMH Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since RMH 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 RMH Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 40%, to S$13m. With any luck the company will be able to grow its way to profitability.

So How Risky Is RMH Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that RMH Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through S$8.6m of cash and made a loss of S$11m. Given it only has net cash of S$3.45m, the company may need to raise more capital if it doesn't reach break-even soon. RMH Holdings's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. For example, we've discovered 4 warning signs for RMH Holdings (3 are significant!) that you should be aware of before investing here.

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.