Despite Lacking Profits Prosperous Future Holdings (HKG:1259) Seems To Be On Top Of Its 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.' 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 note that Prosperous Future Holdings Limited (HKG:1259) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. 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 Prosperous Future Holdings

What Is Prosperous Future Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Prosperous Future Holdings had CN¥185.2m of debt in June 2020, down from CN¥211.5m, one year before. However, its balance sheet shows it holds CN¥516.1m in cash, so it actually has CN¥330.8m net cash.

How Strong Is Prosperous Future Holdings's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Prosperous Future Holdings had liabilities of CN¥416.1m due within 12 months and liabilities of CN¥30.1m due beyond that. On the other hand, it had cash of CN¥516.1m and CN¥183.1m worth of receivables due within a year. So it can boast CN¥253.0m more liquid assets than total liabilities.

This luscious liquidity implies that Prosperous Future Holdings's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Succinctly put, Prosperous Future Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Prosperous Future Holdings'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, Prosperous Future Holdings reported revenue of CN¥987m, which is a gain of 56%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Prosperous Future Holdings?

While Prosperous Future Holdings lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥790k. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Given it also grew revenue by 56% over the last year, we think there's a good chance the company is on track. That growth could mean this is one stock well worth watching. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Prosperous Future Holdings is showing 2 warning signs in our investment analysis , 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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