Ling Yui Holdings (HKG:784) Is Carrying A Fair Bit Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Ling Yui Holdings Limited (HKG:784) does carry debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Ling Yui Holdings

What Is Ling Yui Holdings's Net Debt?

As you can see below, Ling Yui Holdings had HK$40.4m of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. However, it also had HK$14.6m in cash, and so its net debt is HK$25.8m.

How Strong Is Ling Yui Holdings' Balance Sheet?

According to the last reported balance sheet, Ling Yui Holdings had liabilities of HK$98.2m due within 12 months, and liabilities of HK$4.99m due beyond 12 months. Offsetting this, it had HK$14.6m in cash and HK$134.9m in receivables that were due within 12 months. So it can boast HK$46.3m more liquid assets than total liabilities.

This surplus suggests that Ling Yui Holdings is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Ling Yui Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Ling Yui Holdings had a loss before interest and tax, and actually shrunk its revenue by 47%, to HK$241m. To be frank that doesn't bode well.

Caveat Emptor

While Ling Yui Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost HK$6.9m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But a profit would do more to inspire us to research the business more closely. So it seems too risky for our taste. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Ling Yui Holdings (1 can't be ignored!) that you should be aware of before investing here.

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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