Does Renco Holdings Group (HKG:2323) Have A Healthy Balance Sheet?

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.' 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 Renco Holdings Group Limited (HKG:2323) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Renco Holdings Group

What Is Renco Holdings Group's Net Debt?

As you can see below, Renco Holdings Group had HK$1.10b of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has HK$152.2m in cash leading to net debt of about HK$952.2m.

How Healthy Is Renco Holdings Group's Balance Sheet?

According to the last reported balance sheet, Renco Holdings Group had liabilities of HK$1.72b due within 12 months, and liabilities of HK$184.4m due beyond 12 months. Offsetting this, it had HK$152.2m in cash and HK$1.49b in receivables that were due within 12 months. So its liabilities total HK$260.7m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of HK$265.0m, so it does suggest shareholders should keep an eye on Renco Holdings Group's 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 Renco Holdings Group'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, Renco Holdings Group reported revenue of HK$535m, which is a gain of 93%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Renco Holdings Group still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping HK$248m. 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. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of HK$458m into a profit. So we do think this stock is quite risky. 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 Renco Holdings Group has 3 warning signs (and 1 which is potentially serious) we think you should know about.

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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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.