Does Rare Earth Magnesium Technology Group Holdings (HKG:601) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Rare Earth Magnesium Technology Group Holdings Limited (HKG:601) makes use of debt. But is this debt a concern to shareholders?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Rare Earth Magnesium Technology Group Holdings

What Is Rare Earth Magnesium Technology Group Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Rare Earth Magnesium Technology Group Holdings had HK$703.4m of debt, an increase on HK$666.4m, over one year. On the flip side, it has HK$41.2m in cash leading to net debt of about HK$662.3m.

How Healthy Is Rare Earth Magnesium Technology Group Holdings' Balance Sheet?

According to the last reported balance sheet, Rare Earth Magnesium Technology Group Holdings had liabilities of HK$179.1m due within 12 months, and liabilities of HK$654.3m due beyond 12 months. Offsetting this, it had HK$41.2m in cash and HK$533.0k in receivables that were due within 12 months. So it has liabilities totalling HK$791.8m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$52.1m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Rare Earth Magnesium Technology Group Holdings would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Rare Earth Magnesium Technology Group 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 Rare Earth Magnesium Technology Group Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 7.7%, to HK$267m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Rare Earth Magnesium Technology Group Holdings had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping HK$150m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost HK$390m in the last year. So we think buying this stock is risky. 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. For example Rare Earth Magnesium Technology Group Holdings has 4 warning signs (and 2 which don't sit too well with us) we think you should know about.

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.