abc Multiactive (HKG:8131) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, abc Multiactive Limited (HKG:8131) does carry debt. But the real question is whether this debt is making the company risky.

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Why Does Debt Bring Risk?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is abc Multiactive's Net Debt?

As you can see below, at the end of November 2024, abc Multiactive had HK$14.7m of debt, up from HK$13.3m a year ago. Click the image for more detail. But it also has HK$16.0m in cash to offset that, meaning it has HK$1.26m net cash.

How Healthy Is abc Multiactive's Balance Sheet?

According to the last reported balance sheet, abc Multiactive had liabilities of HK$26.3m due within 12 months, and liabilities of HK$326.0k due beyond 12 months. Offsetting these obligations, it had cash of HK$16.0m as well as receivables valued at HK$7.67m due within 12 months. So it has liabilities totalling HK$2.92m more than its cash and near-term receivables, combined.

Of course, abc Multiactive has a market capitalization of HK$44.3m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, abc Multiactive boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since abc Multiactive will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot .

See our latest analysis for abc Multiactive

In the last year abc Multiactive wasn't profitable at an EBIT level, but managed to grow its revenue by 57%, to HK$41m. With any luck the company will be able to grow its way to profitability.

So How Risky Is abc Multiactive?

While abc Multiactive lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$6.2m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The good news for abc Multiactive shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But we still think it's somewhat risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with abc Multiactive .

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.