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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, Pak Wing Group (Holdings) Limited (HKG:8316) does carry debt. But should shareholders be worried about its use of debt?
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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Pak Wing Group (Holdings)’s Net Debt?
The image below, which you can click on for greater detail, shows that Pak Wing Group (Holdings) had debt of HK$34.9m at the end of March 2019, a reduction from HK$38.6m over a year. However, because it has a cash reserve of HK$10.9m, its net debt is less, at about HK$24.0m.
How Healthy Is Pak Wing Group (Holdings)’s Balance Sheet?
The latest balance sheet data shows that Pak Wing Group (Holdings) had liabilities of HK$17.5m due within a year, and liabilities of HK$37.6m falling due after that. On the other hand, it had cash of HK$10.9m and HK$27.0m worth of receivables due within a year. So its liabilities total HK$17.3m more than the combination of its cash and short-term receivables.
Given Pak Wing Group (Holdings) has a market capitalization of HK$183.2m, it’s hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Because it carries more debt than cash, we think it’s worth watching Pak Wing Group (Holdings)’s balance sheet over time. There’s no doubt that we learn most about debt from the balance sheet. But it is Pak Wing Group (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.
Over 12 months, Pak Wing Group (Holdings) saw its revenue drop to HK$98m, which is a fall of 22%. To be frank that doesn’t bode well.
Not only did Pak Wing Group (Holdings)’s revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable HK$20m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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$26m 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 Pak Wing Group (Holdings)’s profit, revenue, and operating cashflow have changed over the last few years.
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.
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 firstname.lastname@example.org. 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.