Is Risecomm Group Holdings (HKG:1679) Using Debt In A Risky Way?

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. We note that Risecomm Group Holdings Limited (HKG:1679) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Risecomm Group Holdings

What Is Risecomm Group Holdings's Net Debt?

The chart below, which you can click on for greater detail, shows that Risecomm Group Holdings had CN¥119.1m in debt in December 2020; about the same as the year before. However, it does have CN¥121.7m in cash offsetting this, leading to net cash of CN¥2.59m.

How Healthy Is Risecomm Group Holdings' Balance Sheet?

The latest balance sheet data shows that Risecomm Group Holdings had liabilities of CN¥357.1m due within a year, and liabilities of CN¥46.9m falling due after that. Offsetting these obligations, it had cash of CN¥121.7m as well as receivables valued at CN¥131.6m due within 12 months. So it has liabilities totalling CN¥150.8m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CN¥184.3m, so it does suggest shareholders should keep an eye on Risecomm Group Holdings' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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. There's no doubt that we learn most about debt from the balance sheet. 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¥213m, which is a fall of 2.5%. We would much prefer see growth.

So How Risky Is Risecomm Group Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Risecomm Group Holdings had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥876k of cash and made a loss of CN¥126m. With only CN¥2.59m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. Case in point: We've spotted 2 warning signs for Risecomm Group Holdings you should be aware of, and 1 of them doesn't sit too well with us.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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