Ling Yui Holdings (HKG:784) Seems To Use Debt Rather Sparingly

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 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. Importantly, Ling Yui Holdings Limited (HKG:784) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Ling Yui Holdings

What Is Ling Yui Holdings's Debt?

The image below, which you can click on for greater detail, shows that Ling Yui Holdings had debt of HK$22.2m at the end of March 2024, a reduction from HK$29.3m over a year. But on the other hand it also has HK$33.3m in cash, leading to a HK$11.1m net cash position.

How Strong Is Ling Yui Holdings' Balance Sheet?

The latest balance sheet data shows that Ling Yui Holdings had liabilities of HK$58.7m due within a year, and liabilities of HK$4.74m falling due after that. Offsetting this, it had HK$33.3m in cash and HK$63.4m in receivables that were due within 12 months. So it can boast HK$33.2m more liquid assets than total liabilities.

This surplus liquidity suggests that Ling Yui Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Ling Yui Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Ling Yui Holdings made a loss at the EBIT level, last year, but improved that to positive EBIT of HK$984k in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Ling Yui Holdings's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Ling Yui Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Ling Yui Holdings actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Ling Yui Holdings has net cash of HK$11.1m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of HK$29m, being 2,986% of its EBIT. So is Ling Yui Holdings's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Ling Yui Holdings is showing 3 warning signs in our investment analysis , and 2 of those shouldn't be ignored...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.