Hopefluent Group Holdings (HKG:733) Has Debt But No Earnings; Should You Worry?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Hopefluent Group Holdings Limited (HKG:733) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Hopefluent Group Holdings

How Much Debt Does Hopefluent Group Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Hopefluent Group Holdings had HK$231.9m of debt in December 2022, down from HK$516.1m, one year before. But it also has HK$401.5m in cash to offset that, meaning it has HK$169.6m 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$491.9m falling due within a year, and liabilities of HK$325.1m due beyond that. Offsetting this, it had HK$401.5m in cash and HK$1.20b in receivables that were due within 12 months. So it can boast HK$781.1m 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. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Hopefluent Group Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hopefluent Group Holdings's earnings that will influence how the balance sheet holds up in the future. 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 Hopefluent Group Holdings had a loss before interest and tax, and actually shrunk its revenue by 43%, to HK$1.5b. To be frank that doesn't bode well.

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$454m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Hopefluent Group Holdings has 2 warning signs (and 1 which makes us a bit uncomfortable) 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.