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.' 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. As with many other companies Ling Yui Holdings Limited (HKG:784) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. 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. 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 examine debt levels, we first consider both cash and debt levels, together.
See 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$29.6m of debt at September 2021, down from HK$44.6m a year prior. However, because it has a cash reserve of HK$9.52m, its net debt is less, at about HK$20.1m.
A Look At Ling Yui Holdings' Liabilities
We can see from the most recent balance sheet that Ling Yui Holdings had liabilities of HK$118.3m falling due within a year, and liabilities of HK$3.63m due beyond that. Offsetting these obligations, it had cash of HK$9.52m as well as receivables valued at HK$160.5m due within 12 months. So it can boast HK$48.1m more liquid assets than total liabilities.
This luscious liquidity implies that Ling Yui Holdings' balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Ling Yui Holdings made a loss at the EBIT level, and saw its revenue drop to HK$295m, which is a fall of 21%. To be frank that doesn't bode well.
Caveat Emptor
Not only did Ling Yui Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at HK$602k. 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. And on top of that, it booked free cash flow of HK$14m and profit of HK$607k over the last year. This one is a bit too risky for our liking. 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. To that end, you should learn about the 3 warning signs we've spotted with Ling Yui Holdings (including 1 which doesn't sit too well with us) .
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.
About SEHK:784
Ling Yui Holdings
An investment holding company, engages in the provision of foundation engineering services in Hong Kong.
Adequate balance sheet and fair value.