Share Dilution

Is Risecomm Group Holdings (HKG:1679) using too much debt?

David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Above all, Risecomm Group Holdings Limited (HKG:1679) is in debt. But the more important question is: what risk does this debt create?

When is debt dangerous?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things go really bad, lenders can take over the business. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

See our latest analysis for Risecomm Group Holdings

How much debt does Risecomm Group Holdings have?

The image below, which you can click for more details, shows that Risecomm Group Holdings had 122.5 million yen in debt at the end of December 2021, a reduction from 239.6 million yen on a year. However, he has 91.7 million national yen of cash to offset this, resulting in a net debt of approximately 30.8 million national yen.

SEHK: 1679 Historical Debt to Equity June 2, 2022

How healthy is Risecomm Group Holdings’ balance sheet?

We can see from the most recent balance sheet that Risecomm Group Holdings had liabilities of 235.9 million yen due within one year, and liabilities of 41.9 million yen due beyond. On the other hand, it had cash of 91.7 million Canadian yen and 129.2 million national yen of receivables due within one year. Thus, its liabilities total 56.9 million Canadian yen more than the combination of its cash and short-term receivables.

Given that Risecomm Group Holdings has a market capitalization of 340.5 million Canadian yen, it’s hard to believe that these liabilities pose a big threat. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in total isolation; since Risecomm Group Holdings will need revenue to repay this debt. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.

Year-over-year, Risecomm Group Holdings reported revenue of 248 million Canadian yen, a gain of 17%, although it reported no earnings before interest and taxes. This rate of growth is a little slow for our liking, but it takes all types to make a world.

Caveat Emptor

Importantly, Risecomm Group Holdings posted a loss in earnings before interest and taxes (EBIT) over the past year. Its EBIT loss was a whopping CN¥46m. Considering that alongside the liabilities mentioned above, this doesn’t give us much confidence that the company should use so much debt. So we think its balance sheet is a little stretched, but not beyond repair. Another reason for caution is that it has lost 28 million Canadian yen in negative free cash flow over the past twelve months. So suffice it to say that we consider the stock to be very risky. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 4 warning signs for Risecomm Group Holdings (2 of which don’t really suit us!) that you should know.

If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.

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.