Warren Buffett famously stated, ‘Volatility is far from synonymous with risk.’ So it seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. We can see that Esprit Holdings Limited (HKG:330) does utilize debt in its business. But should shareholders be worried about its utilize of debt?
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having stated that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, toobtainher.
What Is Esprit Holdings’s Net Debt?
As you can see below, at the finish of June 2025, Esprit Holdings had HK$125.8m of debt, up from none a year ago. Click the image for more detail. However, it does have HK$64.0m in cash offsetting this, leading to net debt of about HK$61.8m.
A Look At Esprit Holdings’ Liabilities
The latest balance sheet data displays that Esprit Holdings had liabilities of HK$50.6m due within a year, and liabilities of HK$172.4m falling due after that. On the other hand, it had cash of HK$64.0m and HK$30.5m worth of receivables due within a year. So it has liabilities totalling HK$128.6m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Esprit Holdings has a market capitalization of HK$339.7m, and so it could probably strengthen its balance sheet by raising capital if it necessaryed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There’s no doubt that we learn most about debt from the balance sheet. But it is Esprit 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 trfinish.
See our latest analysis for Esprit Holdings
In the last year Esprit Holdings managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.
Caveat Emptor
Over the last twelve months Esprit Holdings produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable HK$102m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be applying so much debt. Quite frankly we believe the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of HK$317m into a profit. So to be blunt we do believe it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet – far from it. For instance, we’ve identified 2 warning signs for Esprit Holdings that you should be aware of.
If you’re interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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 applying an unbiased methodology and our articles are not intfinished to be financial advice. It does not constitute a recommfinishation to purchase or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focutilized 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.
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