Here's Why Wan Kei Group Holdings (HKG:1718) Can Afford Some Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Wan Kei Group Holdings Limited (HKG:1718) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Wan Kei Group Holdings

How Much Debt Does Wan Kei Group Holdings Carry?

The image below, which you can click on for greater detail, shows that Wan Kei Group Holdings had debt of HK$186.6m at the end of September 2023, a reduction from HK$237.4m over a year. However, it also had HK$177.8m in cash, and so its net debt is HK$8.81m.

How Strong Is Wan Kei Group Holdings' Balance Sheet?

We can see from the most recent balance sheet that Wan Kei Group Holdings had liabilities of HK$236.3m falling due within a year, and liabilities of HK$3.09m due beyond that. Offsetting these obligations, it had cash of HK$177.8m as well as receivables valued at HK$181.1m due within 12 months. So it actually has HK$119.5m more liquid assets than total liabilities.

This surplus liquidity suggests that Wan Kei 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. There's no doubt that we learn most about debt from the balance sheet. But it is Wan Kei 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 Wan Kei Group Holdings's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Wan Kei Group Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost HK$4.7m at the EBIT level. That said, we're impressed with the strong balance sheet liquidity. That will give the company some time and space to grow and develop its business as need be. While the stock is probably a bit risky, there may be an opportunity if the business itself improves, allowing the company to stage a recovery. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Wan Kei Group Holdings (of which 1 doesn't sit too well with us!) 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.