Qi-House Holdings (HKG:8395) Is Carrying A Fair Bit Of 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 note that Qi-House Holdings Limited (HKG:8395) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Qi-House Holdings

How Much Debt Does Qi-House Holdings Carry?

As you can see below, at the end of March 2024, Qi-House Holdings had HK$20.3m of debt, up from HK$6.46m a year ago. Click the image for more detail. On the flip side, it has HK$12.2m in cash leading to net debt of about HK$8.08m.

How Strong Is Qi-House Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Qi-House Holdings had liabilities of HK$66.8m due within 12 months and liabilities of HK$4.71m due beyond that. Offsetting these obligations, it had cash of HK$12.2m as well as receivables valued at HK$60.2m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Qi-House Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the HK$997.9m company is struggling for cash, we still think it's worth monitoring its balance sheet. Carrying virtually no net debt, Qi-House Holdings has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But it is Qi-House 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 Qi-House Holdings had a loss before interest and tax, and actually shrunk its revenue by 17%, to HK$65m. That's not what we would hope to see.

Caveat Emptor

While Qi-House Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at HK$15m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. So it seems too risky for our taste. 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. For example, we've discovered 1 warning sign for Qi-House Holdings that you should be aware of before investing here.

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.

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