Is Regent Pacific Group (HKG:575) Using Debt In A Risky Way?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Regent Pacific Group Limited (HKG:575) makes use of 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

Check out our latest analysis for Regent Pacific Group

What Is Regent Pacific Group's Debt?

As you can see below, at the end of December 2020, Regent Pacific Group had US$12.8m of debt, up from US$7.50m a year ago. Click the image for more detail. However, because it has a cash reserve of US$5.21m, its net debt is less, at about US$7.59m.

A Look At Regent Pacific Group's Liabilities

According to the last reported balance sheet, Regent Pacific Group had liabilities of US$9.11m due within 12 months, and liabilities of US$20.9m due beyond 12 months. Offsetting this, it had US$5.21m in cash and US$434.0k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$24.4m.

This deficit casts a shadow over the US$5.76m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Regent Pacific Group would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Regent Pacific Group 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.

In the last year Regent Pacific Group wasn't profitable at an EBIT level, but managed to grow its revenue by 1,261%, to US$2.1m. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

Over the last twelve months Regent Pacific Group produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$25m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of US$24m in the last year. So we think this stock is quite risky. We'd prefer to pass. 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. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Regent Pacific Group (of which 2 are concerning!) 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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