HB Global (KLSE:HBGLOB) Is Carrying A Fair Bit Of Debt

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.' 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 note that HB Global Limited (KLSE:HBGLOB) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for HB Global

What Is HB Global's Net Debt?

The image below, which you can click on for greater detail, shows that HB Global had debt of CN¥71.7m at the end of March 2021, a reduction from CN¥108.4m over a year. On the flip side, it has CN¥27.2m in cash leading to net debt of about CN¥44.6m.

A Look At HB Global's Liabilities

According to the balance sheet data, HB Global had liabilities of CN¥107.3m due within 12 months, but no longer term liabilities. On the other hand, it had cash of CN¥27.2m and CN¥37.6m worth of receivables due within a year. So its liabilities total CN¥42.5m more than the combination of its cash and short-term receivables.

Since publicly traded HB Global shares are worth a total of CN¥332.9m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since HB Global 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, HB Global made a loss at the EBIT level, and saw its revenue drop to CN¥109m, which is a fall of 20%. We would much prefer see growth.

Caveat Emptor

While HB Global's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥21m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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 CN¥10m of cash over the last year. So to be blunt we think it is 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, we've discovered 3 warning signs for HB Global that you should be aware of before investing here.

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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