Does Wing Fung Group Asia (HKG:8526) Have A Healthy Balance Sheet?

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. Importantly, Wing Fung Group Asia Limited (HKG:8526) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Wing Fung Group Asia

What Is Wing Fung Group Asia's Debt?

The chart below, which you can click on for greater detail, shows that Wing Fung Group Asia had HK$38.2m in debt in June 2023; about the same as the year before. On the flip side, it has HK$8.18m in cash leading to net debt of about HK$30.0m.

How Healthy Is Wing Fung Group Asia's Balance Sheet?

According to the balance sheet data, Wing Fung Group Asia had liabilities of HK$74.0m due within 12 months, but no longer term liabilities. Offsetting this, it had HK$8.18m in cash and HK$150.6m in receivables that were due within 12 months. So it actually has HK$84.7m more liquid assets than total liabilities.

This excess liquidity is a great indication that Wing Fung Group Asia's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Wing Fung Group Asia 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, Wing Fung Group Asia made a loss at the EBIT level, and saw its revenue drop to HK$154m, which is a fall of 12%. That's not what we would hope to see.

Caveat Emptor

Not only did Wing Fung Group Asia's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping HK$16m. That said, we're impressed with the strong balance sheet liquidity. That should give the business time to grow its cashflow. The company is risky because it will grow into the future to get to profitability and free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Wing Fung Group Asia has 2 warning signs we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.