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 note that Risecomm Group Holdings Limited (HKG:1679) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
How Much Debt Does Risecomm Group Holdings Carry?
As you can see below, Risecomm Group Holdings had CN¥116.2m of debt, at December 2019, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has CN¥145.1m in cash, leading to a CN¥28.9m net cash position.
How Strong Is Risecomm Group Holdings's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Risecomm Group Holdings had liabilities of CN¥101.8m due within 12 months and liabilities of CN¥291.6m due beyond that. Offsetting these obligations, it had cash of CN¥145.1m as well as receivables valued at CN¥118.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥130.0m.
Risecomm Group Holdings has a market capitalization of CN¥613.2m, 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. While it does have liabilities worth noting, Risecomm Group Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Risecomm Group 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.
Over 12 months, Risecomm Group Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥219m, which is a fall of 54%. To be frank that doesn't bode well.
So How Risky Is Risecomm Group Holdings?
While Risecomm Group Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥14m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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 instance, we've identified 4 warning signs for Risecomm Group Holdings (1 shouldn't be ignored) 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. 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. Thank you for reading.