Is Ever Harvest Group Holdings (HKG:1549) Using Debt Sensibly?

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 note that Ever Harvest Group Holdings Limited (HKG:1549) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Ever Harvest Group Holdings

What Is Ever Harvest Group Holdings's Debt?

As you can see below, at the end of June 2020, Ever Harvest Group Holdings had HK$45.5m of debt, up from HK$41.5m a year ago. Click the image for more detail. But on the other hand it also has HK$96.6m in cash, leading to a HK$51.1m net cash position.

A Look At Ever Harvest Group Holdings's Liabilities

Zooming in on the latest balance sheet data, we can see that Ever Harvest Group Holdings had liabilities of HK$114.3m due within 12 months and liabilities of HK$1.48m due beyond that. Offsetting this, it had HK$96.6m in cash and HK$45.8m in receivables that were due within 12 months. So it can boast HK$26.6m more liquid assets than total liabilities.

It's good to see that Ever Harvest Group 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. Simply put, the fact that Ever Harvest Group Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Ever Harvest Group Holdings will need earnings to service that debt. 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, Ever Harvest Group Holdings reported revenue of HK$345m, which is a gain of 4.8%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Ever Harvest Group Holdings?

Although Ever Harvest Group Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of HK$13m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Ever Harvest Group Holdings (of which 1 is potentially serious!) 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. 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.
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