Is Risecomm Group Holdings (HKG:1679) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Risecomm Group Holdings Limited (HKG:1679) does use debt in its business. But should shareholders be worried about its use of debt?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Risecomm Group Holdings

What Is Risecomm Group Holdings's Net Debt?

As you can see below, Risecomm Group Holdings had CN¥128.4m of debt at June 2023, down from CN¥136.2m a year prior. However, it also had CN¥51.3m in cash, and so its net debt is CN¥77.1m.

How Healthy Is Risecomm Group Holdings' Balance Sheet?

According to the last reported balance sheet, Risecomm Group Holdings had liabilities of CN¥230.0m due within 12 months, and liabilities of CN¥11.8m due beyond 12 months. Offsetting this, it had CN¥51.3m in cash and CN¥95.0m in receivables that were due within 12 months. So it has liabilities totalling CN¥95.5m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CN¥156.8m, 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. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Risecomm Group Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥123m, which is a fall of 55%. To be frank that doesn't bode well.

Caveat Emptor

While Risecomm Group 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. Its EBIT loss was a whopping CN¥60m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of CN¥117m. So to be blunt we do think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 5 warning signs for Risecomm Group Holdings (2 are a bit concerning) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.