Is Endurance RP (HKG:575) Weighed On By Its Debt Load?

Warren Buffett famously said, '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 Endurance RP Limited (HKG:575) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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.

See our latest analysis for Endurance RP

What Is Endurance RP's Debt?

As you can see below, Endurance RP had US$13.5m of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has US$3.49m in cash leading to net debt of about US$9.98m.

How Strong Is Endurance RP's Balance Sheet?

We can see from the most recent balance sheet that Endurance RP had liabilities of US$15.5m falling due within a year, and liabilities of US$6.69m due beyond that. On the other hand, it had cash of US$3.49m and US$2.0k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$18.7m.

This deficit casts a shadow over the US$3.53m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Endurance RP would probably need a major re-capitalization if its creditors were to demand repayment. 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 Endurance RP will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

It seems likely shareholders hope that Endurance RP can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

Caveat Emptor

Importantly, Endurance RP had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$17m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through US$1.7m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Endurance RP .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.