Here's Why Ernest Borel Holdings (HKG:1856) Can Afford Some Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Ernest Borel Holdings Limited (HKG:1856) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Ernest Borel Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Ernest Borel Holdings had HK$338.1m of debt, an increase on HK$319.2m, over one year. However, it does have HK$36.7m in cash offsetting this, leading to net debt of about HK$301.4m.

A Look At Ernest Borel Holdings' Liabilities

According to the last reported balance sheet, Ernest Borel Holdings had liabilities of HK$409.9m due within 12 months, and liabilities of HK$41.2m due beyond 12 months. Offsetting these obligations, it had cash of HK$36.7m as well as receivables valued at HK$138.3m due within 12 months. So its liabilities total HK$276.1m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Ernest Borel Holdings is worth HK$504.4m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Ernest Borel Holdings 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 Ernest Borel Holdings

In the last year Ernest Borel Holdings had a loss before interest and tax, and actually shrunk its revenue by 40%, to HK$99m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Ernest Borel Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping HK$78m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled HK$33m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Ernest Borel Holdings (at least 1 which is significant) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.