Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Dragon Crown Group Holdings Limited (HKG:935) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Dragon Crown Group Holdings
What Is Dragon Crown Group Holdings's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Dragon Crown Group Holdings had HK$224.5m of debt, an increase on HK$204.1m, over one year. However, it does have HK$238.9m in cash offsetting this, leading to net cash of HK$14.4m.
How Healthy Is Dragon Crown Group Holdings's Balance Sheet?
The latest balance sheet data shows that Dragon Crown Group Holdings had liabilities of HK$89.6m due within a year, and liabilities of HK$207.3m falling due after that. Offsetting these obligations, it had cash of HK$238.9m as well as receivables valued at HK$48.9m due within 12 months. So it has liabilities totalling HK$9.01m more than its cash and near-term receivables, combined.
This state of affairs indicates that Dragon Crown Group Holdings's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the HK$793.4m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Dragon Crown Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
The modesty of its debt load may become crucial for Dragon Crown Group Holdings if management cannot prevent a repeat of the 23% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Dragon Crown Group Holdings will need earnings to service that debt. 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.