Palinda Group Holdings (HKG:8179) Is Carrying A Fair Bit Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Palinda Group Holdings Limited (HKG:8179) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Palinda Group Holdings

How Much Debt Does Palinda Group Holdings Carry?

The image below, which you can click on for greater detail, shows that at June 2022 Palinda Group Holdings had debt of HK$96.4m, up from HK$73.3m in one year. However, because it has a cash reserve of HK$15.0m, its net debt is less, at about HK$81.4m.

A Look At Palinda Group Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Palinda Group Holdings had liabilities of HK$132.8m due within 12 months and liabilities of HK$1.86m due beyond that. Offsetting these obligations, it had cash of HK$15.0m as well as receivables valued at HK$73.6m due within 12 months. So it has liabilities totalling HK$46.0m more than its cash and near-term receivables, combined.

Palinda Group Holdings has a market capitalization of HK$131.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Palinda Group Holdings's earnings that will influence how the balance sheet holds up in the future. 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 Palinda Group Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 36%, to HK$198m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Palinda Group Holdings still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost HK$796k at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled HK$14m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. For instance, we've identified 4 warning signs for Palinda Group Holdings (2 are concerning) 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.