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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Ling Yui Holdings Limited (HKG:784) makes use of 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Ling Yui Holdings

What Is Ling Yui Holdings's Net Debt?

As you can see below, at the end of March 2023, Ling Yui Holdings had HK$29.3m of debt, up from HK$24.4m a year ago. Click the image for more detail. However, it does have HK$17.4m in cash offsetting this, leading to net debt of about HK$11.9m.

How Strong Is Ling Yui Holdings' Balance Sheet?

We can see from the most recent balance sheet that Ling Yui Holdings had liabilities of HK$98.9m falling due within a year, and liabilities of HK$3.48m due beyond that. Offsetting this, it had HK$17.4m in cash and HK$117.8m in receivables that were due within 12 months. So it can boast HK$32.8m more liquid assets than total liabilities.

It's good to see that Ling Yui Holdings has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Ling Yui 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, Ling Yui Holdings made a loss at the EBIT level, and saw its revenue drop to HK$239m, which is a fall of 31%. That makes us nervous, to say the least.

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. Its EBIT loss was a whopping HK$34m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But a profit would do more to inspire us to research the business more closely. This one is a bit too risky for our liking. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Ling Yui Holdings (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

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. 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.