Nimble Holdings (HKG:186) 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.' 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 note that Nimble Holdings Company Limited (HKG:186) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Nimble Holdings

How Much Debt Does Nimble Holdings Carry?

As you can see below, at the end of March 2021, Nimble Holdings had HK$2.39b of debt, up from HK$213.0m a year ago. Click the image for more detail. However, because it has a cash reserve of HK$430.0m, its net debt is less, at about HK$1.96b.

How Strong Is Nimble Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nimble Holdings had liabilities of HK$3.52b due within 12 months and liabilities of HK$2.40b due beyond that. On the other hand, it had cash of HK$430.0m and HK$71.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$5.42b.

The deficiency here weighs heavily on the HK$3.57b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Nimble Holdings would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Nimble 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.

In the last year Nimble Holdings had a loss before interest and tax, and actually shrunk its revenue by 17%, to HK$200m. That's not what we would hope to see.

Caveat Emptor

Not only did Nimble Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at HK$68m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of HK$51m. In the meantime, we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Nimble Holdings you should know about.

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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