Is Enterprise Development Holdings (HKG:1808) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Enterprise Development Holdings Limited (HKG:1808) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Enterprise Development Holdings

How Much Debt Does Enterprise Development Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Enterprise Development Holdings had CN¥21.9m of debt, an increase on CN¥20.4m, over one year. But on the other hand it also has CN¥310.9m in cash, leading to a CN¥289.0m net cash position.

How Strong Is Enterprise Development Holdings' Balance Sheet?

The latest balance sheet data shows that Enterprise Development Holdings had liabilities of CN¥99.1m due within a year, and liabilities of CN¥70.0k falling due after that. On the other hand, it had cash of CN¥310.9m and CN¥49.2m worth of receivables due within a year. So it can boast CN¥261.0m more liquid assets than total liabilities.

It's good to see that Enterprise Development Holdings has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Enterprise Development Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Enterprise Development Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Enterprise Development Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 203%, to CN¥159m. That's virtually the hole-in-one of revenue growth!

So How Risky Is Enterprise Development Holdings?

Although Enterprise Development Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥20m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We think its revenue growth of 203% is a good sign. We'd see further strong growth as an optimistic indication. 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 example Enterprise Development Holdings has 2 warning signs (and 1 which can't be ignored) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.