Does Yuk Wing Group Holdings (HKG:1536) Have A Healthy Balance Sheet?

June 29, 2021
  •  Updated
August 17, 2022
Source: Shutterstock

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Yuk Wing Group Holdings Limited (HKG:1536) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Yuk Wing Group Holdings

What Is Yuk Wing Group Holdings's Debt?

As you can see below, Yuk Wing Group Holdings had HK$20.0m of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has HK$87.4m in cash, leading to a HK$67.4m net cash position.

SEHK:1536 Debt to Equity History June 29th 2021

How Strong Is Yuk Wing Group Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Yuk Wing Group Holdings had liabilities of HK$40.2m due within 12 months and liabilities of HK$13.0m due beyond that. Offsetting these obligations, it had cash of HK$87.4m as well as receivables valued at HK$58.4m due within 12 months. So it actually has HK$92.7m more liquid assets than total liabilities.

This luscious liquidity implies that Yuk Wing Group Holdings' balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Yuk Wing Group 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 Yuk Wing Group Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Yuk Wing Group Holdings had a loss before interest and tax, and actually shrunk its revenue by 40%, to HK$107m. That makes us nervous, to say the least.

So How Risky Is Yuk Wing Group Holdings?

Although Yuk Wing Group Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of HK$21m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The next few years will be important as the business matures. 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. Be aware that Yuk Wing Group Holdings is showing 2 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

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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About SEHK:1536

Yuk Wing Group Holdings

Yuk Wing Group Holdings Limited, an investment holding company, designs, manufactures, and trades in down-the-hole (DTH) rock drilling tools in Hong Kong, Macau, the People’s Republic of China, and internationally.

Adequate balance sheet and slightly overvalued.