Is Forward Fashion (International) Holdings (HKG:2528) A Risky Investment?

Warren Buffett famously said, '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 Forward Fashion (International) Holdings Company Limited (HKG:2528) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Forward Fashion (International) Holdings

How Much Debt Does Forward Fashion (International) Holdings Carry?

As you can see below, Forward Fashion (International) Holdings had HK$193.6m of debt at June 2024, down from HK$224.5m a year prior. However, it does have HK$95.7m in cash offsetting this, leading to net debt of about HK$97.9m.

How Strong Is Forward Fashion (International) Holdings' Balance Sheet?

The latest balance sheet data shows that Forward Fashion (International) Holdings had liabilities of HK$401.2m due within a year, and liabilities of HK$258.1m falling due after that. Offsetting this, it had HK$95.7m in cash and HK$52.2m in receivables that were due within 12 months. So its liabilities total HK$511.3m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$110.0m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Forward Fashion (International) Holdings would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Forward Fashion (International) Holdings will need earnings to service that debt. 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 Forward Fashion (International) Holdings's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Forward Fashion (International) Holdings produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping HK$53m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of HK$61m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. 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 1 warning sign for Forward Fashion (International) Holdings that you should be aware of.

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.