Is Readboy Education Holding (HKG:2385) Using Debt Sensibly?

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. As with many other companies Readboy Education Holding Company Limited (HKG:2385) makes use of debt. But the real question is whether this debt is making the company risky.

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Why Does Debt Bring Risk?

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. 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.

How Much Debt Does Readboy Education Holding Carry?

As you can see below, Readboy Education Holding had CN¥41.2m of debt at December 2024, down from CN¥55.3m a year prior. However, its balance sheet shows it holds CN¥272.0m in cash, so it actually has CN¥230.8m net cash.

How Healthy Is Readboy Education Holding's Balance Sheet?

The latest balance sheet data shows that Readboy Education Holding had liabilities of CN¥210.1m due within a year, and liabilities of CN¥33.6m falling due after that. Offsetting these obligations, it had cash of CN¥272.0m as well as receivables valued at CN¥31.7m due within 12 months. So it actually has CN¥59.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Readboy Education Holding could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Readboy Education Holding has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Readboy Education Holding'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.

See our latest analysis for Readboy Education Holding

Over 12 months, Readboy Education Holding reported revenue of CN¥461m, which is a gain of 28%, 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.

So How Risky Is Readboy Education Holding?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Readboy Education Holding lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥18m of cash and made a loss of CN¥59m. But the saving grace is the CN¥230.8m on the balance sheet. That means it could keep spending at its current rate for more than two years. Readboy Education Holding's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. We've identified 1 warning sign with Readboy Education Holding , and understanding them should be part of your investment process.

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.