Is Frontier Services Group (HKG:500) Weighed On By Its Debt Load?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Frontier Services Group Limited (HKG:500) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Frontier Services Group

What Is Frontier Services Group's Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Frontier Services Group had debt of HK$191.4m, up from HK$28.3m in one year. But it also has HK$213.1m in cash to offset that, meaning it has HK$21.7m net cash.

A Look At Frontier Services Group's Liabilities

According to the last reported balance sheet, Frontier Services Group had liabilities of HK$314.3m due within 12 months, and liabilities of HK$376.3m due beyond 12 months. Offsetting these obligations, it had cash of HK$213.1m as well as receivables valued at HK$268.7m due within 12 months. So its liabilities total HK$208.7m more than the combination of its cash and short-term receivables.

Frontier Services Group has a market capitalization of HK$703.4m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Frontier Services Group also has more cash than debt, so we're pretty confident 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 Frontier Services Group 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.

In the last year Frontier Services Group wasn't profitable at an EBIT level, but managed to grow its revenue by 46%, to HK$950m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Frontier Services Group?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Frontier Services Group lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through HK$20m of cash and made a loss of HK$159m. However, it has net cash of HK$21.7m, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, Frontier Services Group may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Frontier Services Group 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.