Yuk Wing Group Holdings (HKG:1536) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Yuk Wing Group Holdings Limited (HKG:1536) does have debt on its balance sheet. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Yuk Wing Group Holdings

What Is Yuk Wing Group Holdings's Net Debt?

The chart below, which you can click on for greater detail, shows that Yuk Wing Group Holdings had HK$20.0m in debt in March 2022; about the same as the year before. However, its balance sheet shows it holds HK$89.7m in cash, so it actually has HK$69.7m net cash.

How Healthy Is Yuk Wing Group Holdings' Balance Sheet?

According to the last reported balance sheet, Yuk Wing Group Holdings had liabilities of HK$35.5m due within 12 months, and liabilities of HK$11.0m due beyond 12 months. Offsetting these obligations, it had cash of HK$89.7m as well as receivables valued at HK$61.9m due within 12 months. So it actually has HK$105.1m 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). On this view, lenders should feel as safe as the beloved of a black-belt karate master. 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 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$142m, which is a gain of 33%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Yuk Wing Group Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Yuk Wing Group Holdings lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of HK$7.2m and booked a HK$454k accounting loss. With only HK$69.7m on the balance sheet, it would appear that its going to need to raise capital again soon. Yuk Wing Group Holdings's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Yuk Wing Group Holdings .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.