Here's Why Yee Hop Holdings (HKG:1662) Can Afford Some Debt

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. We note that Yee Hop Holdings Limited (HKG:1662) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Yee Hop Holdings

What Is Yee Hop Holdings's Debt?

As you can see below, at the end of September 2020, Yee Hop Holdings had HK$200.4m of debt, up from HK$109.5m a year ago. Click the image for more detail. However, it also had HK$126.0m in cash, and so its net debt is HK$74.3m.

How Healthy Is Yee Hop Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Yee Hop Holdings had liabilities of HK$380.6m due within 12 months and liabilities of HK$62.7m due beyond that. Offsetting these obligations, it had cash of HK$126.0m as well as receivables valued at HK$286.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$31.4m.

Given Yee Hop Holdings has a market capitalization of HK$1.49b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Yee Hop 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, Yee Hop Holdings reported revenue of HK$1.1b, which is a gain of 51%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Yee Hop Holdings managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost HK$47m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Surprisingly, we note that it actually reported positive free cash flow of HK$18m and a profit of HK$15m. So one might argue that there's still a chance it can get things on the right track. 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. For example, we've discovered 4 warning signs for Yee Hop Holdings (1 is a bit unpleasant!) that you should be aware of before investing here.

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. 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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