David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, Honbridge Holdings Limited (HKG:8137) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Honbridge Holdings

What Is Honbridge Holdings's Debt?

As you can see below, Honbridge Holdings had HK$292.1m of debt at December 2021, down from HK$429.1m a year prior. But it also has HK$551.3m in cash to offset that, meaning it has HK$259.3m net cash.

How Healthy Is Honbridge Holdings' Balance Sheet?

The latest balance sheet data shows that Honbridge Holdings had liabilities of HK$264.7m due within a year, and liabilities of HK$2.36b falling due after that. Offsetting this, it had HK$551.3m in cash and HK$120.6m in receivables that were due within 12 months. So it has liabilities totalling HK$1.95b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of HK$2.97b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Honbridge Holdings 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 it is Honbridge Holdings'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 Honbridge Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to HK$396m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Honbridge Holdings?

Although Honbridge Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of HK$100m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. For riskier companies like Honbridge Holdings I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.