Is Wing Fung Group Asia (HKG:8526) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Wing Fung Group Asia Limited (HKG:8526) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Wing Fung Group Asia

What Is Wing Fung Group Asia's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Wing Fung Group Asia had HK$38.4m of debt, an increase on HK$26.8m, over one year. On the flip side, it has HK$12.0m in cash leading to net debt of about HK$26.3m.

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

According to the balance sheet data, Wing Fung Group Asia had liabilities of HK$84.6m due within 12 months, but no longer term liabilities. On the other hand, it had cash of HK$12.0m and HK$158.7m worth of receivables due within a year. So it actually has HK$86.1m more liquid assets than total liabilities.

This surplus liquidity suggests that Wing Fung Group Asia's 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is Wing Fung Group Asia's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Wing Fung Group Asia reported revenue of HK$184m, which is a gain of 5.3%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Wing Fung Group Asia had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping HK$12m. Having said that, the balance sheet has plenty of liquid assets for now. That will give the company some time and space to grow and develop its business as need be. While the stock is probably a bit risky, there may be an opportunity if the business itself improves, allowing the company to stage a recovery. 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. We've identified 3 warning signs with Wing Fung Group Asia , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.