David Iben put it well when he said, “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. We notice that Deson Development International Holdings Limited (HKG: 262) has debt on its balance sheet. But does this debt worry shareholders?
When is debt a problem?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. 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 consider both liquidity and debt levels.
See our latest analysis for Deson Development International Holdings
What is the debt of Deson Development International Holdings?
As you can see below, at the end of March 2021, Deson Development International Holdings had a debt of HK $ 485.5 million, up from HK $ 423.0 million a year ago. Click on the image for more details. However, he has HK $ 20.6million in cash offsetting this, leading to net debt of around HK $ 464.9million.
How strong is Deson Development International Holdings’ balance sheet?
According to the latest published balance sheet, Deson Development International Holdings had liabilities of HK $ 393.9 million due within 12 months and liabilities of HK $ 410.7 million due beyond 12 months. On the other hand, he had HK $ 20.6 million in cash and HK $ 68.4 million in receivables due within one year. Its liabilities therefore total HK $ 715.6 million more than the combination of its cash and short-term receivables.
The lack here weighs heavily on the HK $ 111.5million business itself, as if a child struggles under the weight of a huge backpack full of books, his gym equipment and a trumpet. We therefore believe that shareholders should monitor it closely. Ultimately, Deson Development International Holdings would likely need a major recapitalization if its creditors demanded repayment. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in isolation; since Deson Development International Holdings will need revenue to repay this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
In the past year, Deson Development International Holdings has incurred a loss before interest and taxes and has actually reduced its revenue by 70%, to HK $ 104 million. It makes us nervous, to say the least.
While Deson Development International Holdings’ decline in revenue is about as comforting as a wet hedge, its earnings before interest and taxes (EBIT) can be said to be even less attractive. His EBIT loss was HK $ 43 million. Thinking about this and the large total liabilities, it’s hard to know what to say about the stock due to our intense de-refinement for it. Of course, the company could have a great story on how it is heading towards a better future. But the reality is, he’s low on liquid assets compared to liabilities, and he burned HK $ 38 million last year. So is this a high risk action? We think so, and we would avoid it. 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. These risks can be difficult to spot. Every business has them, and we’ve spotted 2 warning signs for Deson Development International Holdings (1 of which is a bit disturbing!) that you should know about.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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