Health Check: How Prudently Does Yuk Wing Group Holdings (HKG:1536) Use Debt?

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. Importantly, Yuk Wing Group Holdings Limited (HKG:1536) does carry debt. But the more important question is: how much risk is that debt creating?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out the opportunities and risks within the HK Machinery industry.

What Is Yuk Wing Group Holdings's Debt?

The image below, which you can click on for greater detail, shows that at September 2022 Yuk Wing Group Holdings had debt of HK$33.9m, up from HK$20.0m in one year. But it also has HK$98.8m in cash to offset that, meaning it has HK$64.9m net cash.

How Strong Is Yuk Wing Group Holdings' Balance Sheet?

We can see from the most recent balance sheet that Yuk Wing Group Holdings had liabilities of HK$67.1m falling due within a year, and liabilities of HK$10.0m due beyond that. Offsetting this, it had HK$98.8m in cash and HK$62.7m in receivables that were due within 12 months. So it can boast HK$84.3m more liquid assets than total liabilities.

This surplus strongly suggests that Yuk Wing Group Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Yuk Wing 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.

Over 12 months, Yuk Wing Group Holdings reported revenue of HK$149m, which is a gain of 14%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

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 made a statutory profit of HK$1.3m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. There's no doubt the next few years will be crucial to how 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 3 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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 using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused 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.