Here's Why Nimble Holdings (HKG:186) Can Afford Some Debt

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.' 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 Nimble Holdings Company Limited (HKG:186) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Nimble Holdings

How Much Debt Does Nimble Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Nimble Holdings had HK$1.23b of debt, an increase on none, over one year. However, because it has a cash reserve of HK$874.0m, its net debt is less, at about HK$357.0m.

How Healthy Is Nimble Holdings' Balance Sheet?

According to the last reported balance sheet, Nimble Holdings had liabilities of HK$1.24b due within 12 months, and liabilities of HK$256.0m due beyond 12 months. On the other hand, it had cash of HK$874.0m and HK$47.0m worth of receivables due within a year. So it has liabilities totalling HK$573.0m more than its cash and near-term receivables, combined.

Of course, Nimble Holdings has a market capitalization of HK$3.46b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Nimble 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.

Over 12 months, Nimble Holdings reported revenue of HK$200m, which is a gain of 4.6%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Nimble Holdings produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at HK$29m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through HK$566m of cash over the last year. So in short it's a really risky stock. 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. To that end, you should learn about the 3 warning signs we've spotted with Nimble Holdings (including 2 which make us uncomfortable) .

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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