Health Check: How Prudently Does Hopefluent Group Holdings (HKG:733) Use 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. As with many other companies Hopefluent Group Holdings Limited (HKG:733) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Hopefluent Group Holdings

What Is Hopefluent Group Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Hopefluent Group Holdings had debt of HK$139.5m at the end of June 2024, a reduction from HK$184.9m over a year. But it also has HK$215.2m in cash to offset that, meaning it has HK$75.6m net cash.

A Look At Hopefluent Group Holdings' Liabilities

We can see from the most recent balance sheet that Hopefluent Group Holdings had liabilities of HK$270.1m falling due within a year, and liabilities of HK$211.4m due beyond that. On the other hand, it had cash of HK$215.2m and HK$1.05b worth of receivables due within a year. So it actually has HK$782.0m 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. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Hopefluent Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Hopefluent Group Holdings 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.

While it hasn't made a profit, at least Hopefluent Group Holdings booked its first revenue as a publicly listed company, in the last twelve months.

So How Risky Is Hopefluent Group Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Hopefluent Group Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through HK$79m of cash and made a loss of HK$497m. While this does make the company a bit risky, it's important to remember it has net cash of HK$75.6m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Hopefluent Group Holdings (of which 1 is concerning!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.