Is Forward Fashion (International) Holdings (HKG:2528) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Forward Fashion (International) Holdings Company Limited (HKG:2528) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Forward Fashion (International) Holdings

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

The chart below, which you can click on for greater detail, shows that Forward Fashion (International) Holdings had HK$343.0m in debt in December 2020; about the same as the year before. However, it does have HK$309.7m in cash offsetting this, leading to net debt of about HK$33.2m.

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

Zooming in on the latest balance sheet data, we can see that Forward Fashion (International) Holdings had liabilities of HK$695.1m due within 12 months and liabilities of HK$321.2m due beyond that. Offsetting these obligations, it had cash of HK$309.7m as well as receivables valued at HK$65.4m due within 12 months. So its liabilities total HK$641.2m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$376.0m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Forward Fashion (International) Holdings would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Forward Fashion (International) 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, Forward Fashion (International) Holdings made a loss at the EBIT level, and saw its revenue drop to HK$884m, which is a fall of 41%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Forward Fashion (International) Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable HK$235m at the EBIT level. 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$131m. And until that time we think this is a risky stock. 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. We've identified 2 warning signs with Forward Fashion (International) Holdings (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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.

If you’re looking to trade a wide range of investments, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.