We believe Elife Holdings (HKG: 223) has a good deal of debt
Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. ” So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We notice that Elife Holdings Limited (HKG: 223) has debt on its balance sheet. But the real question is whether this debt makes the business risky.
When Is Debt a Problem?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we think of a business’s use of debt, we first look at cash flow and debt together.
Check out our latest analysis for Elife Holdings
What is the net debt of Elife Holdings?
As you can see below, Elife Holdings was in debt of HK $ 23.7million in March 2021, up from HK $ 41.0million the year before. However, given that he has a cash reserve of HK $ 15.5 million, his net debt is less, at around HK $ 8.18 million.
How healthy is Elife Holdings’ balance sheet?
According to the latest published balance sheet, Elife Holdings had a liability of HK $ 35.2 million due within 12 months and a liability of HK $ 18.3 million due beyond 12 months. In return, he had HK $ 15.5 million in cash and HK $ 43.9 million in receivables due within 12 months. He can therefore claim HK $ 6.00 million more in liquid assets than total Liabilities.
This surplus suggests that Elife Holdings has a prudent balance sheet and could likely eliminate its debt without too much difficulty. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is the earnings of Elife Holdings that will influence the balance sheet in the future. So if you want to know more about its profits, it may be worth checking out this chart of its long term profit trend.
Last year Elife Holdings was unprofitable on EBIT level, but managed to increase its revenue by 404%, to HK $ 276 million. It’s practically the hole-in-one for revenue growth!
While we can certainly appreciate the revenue growth of Elife Holdings, its earnings before interest and taxes (EBIT) are not ideal. Indeed, it lost 34 million Hong Kong dollars in EBIT. On a more positive note, the company has liquid assets, so it has some time to improve its operations before debt becomes a serious problem. But we would like to see positive free cash flow before we spend a lot of time trying to figure out the headline. That said, the rate of revenue growth is likely to impress the market, greatly facilitating any potential fundraising, if needed. So it’s risky, but with some potential. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. We have identified 5 warning signs with Elife Holdings (at least 2 which are a bit worrying), and understanding them should be part of your investment process.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash growth net stocks today.
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