Here's Why HB Global (KLSE:HBGLOB) Can Afford Some Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, HB Global Limited (KLSE:HBGLOB) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. 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 HB Global

How Much Debt Does HB Global Carry?

The image below, which you can click on for greater detail, shows that at June 2022 HB Global had debt of CN¥84.8m, up from CN¥71.7m in one year. However, because it has a cash reserve of CN¥3.19m, its net debt is less, at about CN¥81.6m.

How Strong Is HB Global's Balance Sheet?

According to the last reported balance sheet, HB Global had liabilities of CN¥115.8m due within 12 months, and liabilities of CN¥7.79m due beyond 12 months. Offsetting these obligations, it had cash of CN¥3.19m as well as receivables valued at CN¥74.0m due within 12 months. So it has liabilities totalling CN¥46.3m more than its cash and near-term receivables, combined.

HB Global has a market capitalization of CN¥136.2m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is HB Global'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.

In the last year HB Global had a loss before interest and tax, and actually shrunk its revenue by 9.9%, to CN¥109m. We would much prefer see growth.

Caveat Emptor

Importantly, HB Global had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CN¥37m. 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. Another cause for caution is that is bled CN¥19m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. To that end, you should learn about the 4 warning signs we've spotted with HB Global (including 3 which make us uncomfortable) .

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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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.