Health Check: How Prudently Does Phoenitron Holdings (HKG:8066) Use 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Phoenitron Holdings Limited (HKG:8066) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, 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.

View our latest analysis for Phoenitron Holdings

What Is Phoenitron Holdings's Debt?

The image below, which you can click on for greater detail, shows that Phoenitron Holdings had debt of HK$842.0k at the end of June 2019, a reduction from HK$9.52m over a year. However, it does have HK$9.94m in cash offsetting this, leading to net cash of HK$9.10m.

A Look At Phoenitron Holdings's Liabilities

Zooming in on the latest balance sheet data, we can see that Phoenitron Holdings had liabilities of HK$44.2m due within 12 months and liabilities of HK$8.58m due beyond that. Offsetting this, it had HK$9.94m in cash and HK$109.1m in receivables that were due within 12 months. So it actually has HK$66.2m more liquid assets than total liabilities.

This luscious liquidity implies that Phoenitron Holdings's balance sheet is sturdy like a giant sequoia tree. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Simply put, the fact that Phoenitron Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Phoenitron 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 Phoenitron Holdings actually shrunk its revenue by 62%, to HK$54m. That makes us nervous, to say the least.

So How Risky Is Phoenitron Holdings?

While Phoenitron Holdings lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of HK$16m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. The next few years will be important as the business matures. For riskier companies like Phoenitron 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.

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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