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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. As with many other companies Dragon Rise Group Holdings Limited (HKG:6829) makes use of debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Dragon Rise Group Holdings
What Is Dragon Rise Group Holdings's Net Debt?
The image below, which you can click on for greater detail, shows that Dragon Rise Group Holdings had debt of HK$2.46m at the end of March 2019, a reduction from HK$4.71m over a year. But on the other hand it also has HK$111.4m in cash, leading to a HK$108.9m net cash position.
How Strong Is Dragon Rise Group Holdings's Balance Sheet?
We can see from the most recent balance sheet that Dragon Rise Group Holdings had liabilities of HK$37.4m falling due within a year, and liabilities of HK$4.80m due beyond that. Offsetting these obligations, it had cash of HK$111.4m as well as receivables valued at HK$131.3m due within 12 months. So it actually has HK$200.5m more liquid assets than total liabilities.
This excess liquidity is a great indication that Dragon Rise Group Holdings's balance sheet is just as strong as racists are weak. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Simply put, the fact that Dragon Rise Group Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.
It is just as well that Dragon Rise Group Holdings's load is not too heavy, because its EBIT was down 83% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Rise 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.