Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Yee Hop Holdings Limited (HKG:1662) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Yee Hop Holdings
How Much Debt Does Yee Hop Holdings Carry?
The image below, which you can click on for greater detail, shows that at September 2020 Yee Hop Holdings had debt of HK$200.4m, up from HK$109.5m in one year. However, it also had HK$126.0m in cash, and so its net debt is HK$74.3m.
How Healthy Is Yee Hop Holdings's Balance Sheet?
We can see from the most recent balance sheet that Yee Hop Holdings had liabilities of HK$380.6m falling due within a year, and liabilities of HK$62.7m due beyond that. Offsetting this, it had HK$126.0m in cash and HK$286.0m in receivables that were due within 12 months. So it has liabilities totalling HK$31.4m more than its cash and near-term receivables, combined.
Having regard to Yee Hop Holdings's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the HK$1.67b company is struggling for cash, we still think it's worth monitoring its balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But it is Yee Hop 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 Yee Hop Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 51%, to HK$1.1b. Shareholders probably have their fingers crossed that it can grow its way to profits.
Caveat Emptor
While we can certainly appreciate Yee Hop Holdings's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost HK$47m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through HK$70m of cash over the last year. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 5 warning signs for Yee Hop Holdings (2 are concerning) you should be aware of.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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This article by Simply Wall St is general in nature. 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.
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About SEHK:1662
Yee Hop Holdings
An investment holding company, provides engineering and construction services in Hong Kong, the People’s Republic of China, and the Philippines.
Flawless balance sheet with proven track record.