Health Check: How Prudently Does Hopefluent Group Holdings (HKG:733) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Hopefluent Group Holdings Limited (HKG:733) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Hopefluent Group Holdings

What Is Hopefluent Group Holdings's Debt?

The image below, which you can click on for greater detail, shows that Hopefluent Group Holdings had debt of HK$167.3m at the end of December 2023, a reduction from HK$231.9m over a year. But it also has HK$303.0m in cash to offset that, meaning it has HK$135.8m net cash.

A Look At Hopefluent Group Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Hopefluent Group Holdings had liabilities of HK$352.5m due within 12 months and liabilities of HK$181.7m due beyond that. Offsetting this, it had HK$303.0m in cash and HK$1.13b in receivables that were due within 12 months. So it can boast HK$896.7m more liquid assets than total liabilities.

This excess liquidity is a great indication that Hopefluent Group Holdings' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Hopefluent Group 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 Hopefluent Group 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, Hopefluent Group Holdings made a loss at the EBIT level, and saw its revenue drop to HK$1.3b, which is a fall of 15%. We would much prefer see growth.

So How Risky Is Hopefluent Group Holdings?

While Hopefluent Group Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$5.3m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. There's no doubt the next few years will be crucial to how the business matures. 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. We've identified 2 warning signs with Hopefluent Group Holdings (at least 1 which is significant) , and understanding them should be part of your investment process.

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. 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.