Is Yuk Wing Group Holdings (HKG:1536) A Risky Investment?

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. Importantly, Yuk Wing Group Holdings Limited (HKG:1536) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Yuk Wing Group Holdings

How Much Debt Does Yuk Wing Group Holdings Carry?

The image below, which you can click on for greater detail, shows that Yuk Wing Group Holdings had debt of HK$23.0m at the end of March 2024, a reduction from HK$28.2m over a year. But it also has HK$69.3m in cash to offset that, meaning it has HK$46.3m 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$41.7m falling due within a year, and liabilities of HK$7.20m due beyond that. Offsetting these obligations, it had cash of HK$69.3m as well as receivables valued at HK$60.5m due within 12 months. So it can boast HK$80.8m more liquid assets than total liabilities.

This surplus liquidity suggests that Yuk Wing Group Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Yuk Wing Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. 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 5.6%, to HK$148m. That's not what we would hope to see.

So How Risky Is Yuk Wing Group Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Yuk Wing Group Holdings had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of HK$9.3m and booked a HK$19m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of HK$46.3m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Yuk Wing Group Holdings you should know about.

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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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.