Is Rykadan Capital (HKG:2288) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Rykadan Capital Limited (HKG:2288) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Rykadan Capital

How Much Debt Does Rykadan Capital Carry?

The image below, which you can click on for greater detail, shows that Rykadan Capital had debt of HK$339.6m at the end of September 2020, a reduction from HK$402.7m over a year. But it also has HK$564.6m in cash to offset that, meaning it has HK$225.0m net cash.

A Look At Rykadan Capital's Liabilities

Zooming in on the latest balance sheet data, we can see that Rykadan Capital had liabilities of HK$375.0m due within 12 months and no liabilities due beyond that. On the other hand, it had cash of HK$564.6m and HK$183.1m worth of receivables due within a year. So it can boast HK$372.8m more liquid assets than total liabilities.

This surplus liquidity suggests that Rykadan Capital's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Succinctly put, Rykadan Capital 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 Rykadan Capital 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 Rykadan Capital had a loss before interest and tax, and actually shrunk its revenue by 75%, to HK$221m. That makes us nervous, to say the least.

So How Risky Is Rykadan Capital?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Rykadan Capital had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of HK$141m and booked a HK$17m accounting loss. With only HK$225.0m on the balance sheet, it would appear that its going to need to raise capital again soon. 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. 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. For instance, we've identified 2 warning signs for Rykadan Capital that you should be aware of.

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. 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.
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