Here's Why Hong Kong Finance Investment Holding Group (HKG:7) Might Be Better Off Without Debt
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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.' 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. We can see that Hong Kong Finance Investment Holding Group Limited (HKG:7) does use debt in its business. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Hong Kong Finance Investment Holding Group
What Is Hong Kong Finance Investment Holding Group's Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2018 Hong Kong Finance Investment Holding Group had HK$529.6m of debt, an increase on HK$415.6m, over one year. However, because it has a cash reserve of HK$41.2m, its net debt is less, at about HK$488.5m.
A Look At Hong Kong Finance Investment Holding Group's Liabilities
The latest balance sheet data shows that Hong Kong Finance Investment Holding Group had liabilities of HK$483.3m due within a year, and liabilities of HK$480.3m falling due after that. Offsetting this, it had HK$41.2m in cash and HK$300.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$622.3m.
Since publicly traded Hong Kong Finance Investment Holding Group shares are worth a total of HK$3.48b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Because it carries more debt than cash, we think it's worth watching Hong Kong Finance Investment Holding Group's balance sheet over time. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Hong Kong Finance Investment Holding Group 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.
In the last year Hong Kong Finance Investment Holding Group managed to grow its revenue by 953%, to HK$933m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!
Caveat Emptor
Despite the top line growth, Hong Kong Finance Investment Holding Group still had negative earnings before interest and tax (EBIT), over the last year. To be specific the EBIT loss came in at HK$15m. 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. Another cause for caution is that is bled HK$257m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Hong Kong Finance Investment Holding Group's profit, revenue, and operating cashflow have changed over the last few years.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
