Health Check: How Cautiously Does Enterprise Development Holdings (HKG: 1808) Use Debt?

Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried “. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Above all, Enterprise Development Holdings Limited (HKG: 1808) carries the debt. But the most important question is: what risk does this debt create?

When is debt dangerous?

Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we look at debt levels, we first look at cash and debt levels, together.

Check out our latest analysis for Enterprise Development Holdings

What is the net debt of Enterprise Development Holdings?

You can click on the graph below for historical figures, but it shows that Enterprise Development Holdings had a debt of CN 9.77 million in June 2021, compared to CN 14.6 million a year earlier. However, his balance sheet shows that he holds CND 129.8 million in cash, so he actually has net cash of CNN 120.0 million.

How strong is Enterprise Development Holdings’ balance sheet?

According to balance sheet data, Enterprise Development Holdings had CN 26.5 million liabilities due within 12 months, but no longer term liabilities. In compensation for these obligations, it had cash of CND 129.8 million as well as receivables valued at CN ¥ 43.0 million due within 12 months. So he actually CN ¥ 146.2m Following liquid assets as total liabilities.

This abundant liquidity means that Enterprise Development Holdings’ balance sheet is as solid as a giant sequoia. From this point of view, lenders should feel as secure as the beloved of a black belt karate master. In short, Enterprise Development Holdings has a net cash flow, so it’s fair to say that it doesn’t have a lot of debt! There is no doubt that we learn the most about debt from the balance sheet. But it is the earnings of Enterprise Development Holdings that will influence the balance sheet in the future. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.

Over the past year, Enterprise Development Holdings has recorded a loss before interest and taxes and actually reduced its revenue by 33%, to CNN 61 million. It makes us nervous, to say the least.

So how risky are business development holdings?

By their very nature, businesses that lose money are riskier than those with a long history of profitability. And over the past year, Enterprise Development Holdings has recorded a loss of earnings before interest and taxes (EBIT), frankly. And during the same period, it recorded a negative free cash outflow of CNN 23 million and recorded a book loss of CN 20 million. But the saving grace is the CN Â¥ 120.0m on the balance sheet. This jackpot means the business can continue to spend on growth for at least two years, at current rates. Overall, its balance sheet doesn’t look too risky at the moment, but we are still cautious until we see positive free cash flow. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. Note that Enterprise Development Holdings shows 2 warning signs in our investment analysis , and 1 of them cannot be ignored …

At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.

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

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