Would Ernest Borel Holdings (HKG:1856) be better off with less debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We note that Ernest Borel Holdings Limited (HKG:1856) has a debt on its balance sheet. But should shareholders worry about its use of debt?

When is debt a problem?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth, without any negative consequences. When we think about a company’s use of debt, we first look at cash and debt together.

See our latest analysis for Ernest Borel Holdings

What is Ernest Borel Holdings’ net debt?

The image below, which you can click on for more details, shows that as of December 2021, Ernest Borel Holdings had HK$283.0 million in debt, up from HK$264.0 million in one year . On the other hand, he has HK$9.36 million in cash, resulting in a net debt of around HK$273.6 million.

SEHK: 1856 Debt to Equity History June 2, 2022

A look at the liabilities of Ernest Borel Holdings

According to the latest published balance sheet, Ernest Borel Holdings had liabilities of HK$324.5 million due within 12 months and liabilities of HK$30.1 million due beyond 12 months. In return, he had HK$9.36 million in cash and HK$40.0 million in debt due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of HK$305.2 million.

This shortfall is not that bad as Ernest Borel Holdings is worth HK$903.3 million and therefore could probably raise enough capital to shore up its balance sheet, should the need arise. But it is clear that it is essential to examine closely whether it can manage its debt without dilution. There is no doubt that we learn the most about debt from the balance sheet. But it is the profits of Ernest Borel Holdings that will influence the balance sheet in the future. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.

Last year, Ernest Borel Holdings was not profitable in terms of EBIT, but managed to increase its turnover by 22%, to HK$149 million. With a little luck, the company will be able to progress towards profitability.

Caveat Emptor

Despite the growth in revenue, Ernest Borel Holdings still posted a loss in earnings before interest and taxes (EBIT) over the past year. Indeed, it lost HK$21 million in EBIT. When we look at this and recall the liabilities on its balance sheet, versus cash, it seems unwise to us that the company has liabilities. So we think its balance sheet is a little stretched, but not beyond repair. However, it doesn’t help that it has burned HK$4.0 million in the past year. So, to be frank, we think it’s risky. When looking at a riskier business, we like to check how its profits (or losses) have changed over time. Today, we provide readers with this interactive chart showing how Ernest Borel Holdings earnings, revenue and operating cash flow have changed over the past few years.

In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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