Is Wing Fung Group Asia (HKG:8526) Using Too Much Debt?

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 should shareholders be worried about its use of debt?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Wing Fung Group Asia

What Is Wing Fung Group Asia's Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Wing Fung Group Asia had debt of HK$38.6m, up from HK$32.7m in one year. On the flip side, it has HK$19.6m in cash leading to net debt of about HK$19.0m.

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

We can see from the most recent balance sheet that Wing Fung Group Asia had liabilities of HK$82.9m falling due within a year, and liabilities of HK$32.0k due beyond that. Offsetting these obligations, it had cash of HK$19.6m as well as receivables valued at HK$159.6m due within 12 months. So it can boast HK$96.2m 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. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year Wing Fung Group Asia had a loss before interest and tax, and actually shrunk its revenue by 25%, to HK$174m. To be frank that doesn't bode well.

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$31m. 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. The company is risky because it will grow into the future to get to profitability and free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Wing Fung Group Asia (of which 3 are a bit concerning!) you should know about.

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.