Frontier Services Group (HKG:500) Is Making Moderate Use Of Debt

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.' 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 Frontier Services Group Limited (HKG:500) makes use of debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Frontier Services Group

How Much Debt Does Frontier Services Group Carry?

As you can see below, Frontier Services Group had HK$190.1m of debt, at December 2022, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has HK$186.8m in cash leading to net debt of about HK$3.29m.

A Look At Frontier Services Group's Liabilities

The latest balance sheet data shows that Frontier Services Group had liabilities of HK$344.9m due within a year, and liabilities of HK$276.0m falling due after that. On the other hand, it had cash of HK$186.8m and HK$298.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$135.2m.

While this might seem like a lot, it is not so bad since Frontier Services Group has a market capitalization of HK$584.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Carrying virtually no net debt, Frontier Services Group has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Frontier Services Group 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 Frontier Services Group wasn't profitable at an EBIT level, but managed to grow its revenue by 28%, to HK$964m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Frontier Services Group's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping HK$75m. 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. However, it doesn't help that it burned through HK$35m of cash over the last year. So in short it's a really risky stock. 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. To that end, you should be aware of the 3 warning signs we've spotted with Frontier Services Group .

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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