We Think Wing Fung Group Asia (HKG:8526) Has A Fair Chunk Of Debt

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.' 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. 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?

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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Wing Fung Group Asia

What Is Wing Fung Group Asia's Net Debt?

As you can see below, Wing Fung Group Asia had HK$38.2m of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. 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?

Zooming in on the latest balance sheet data, we can see that Wing Fung Group Asia had liabilities of HK$74.0m due within 12 months and no liabilities due beyond that. On the other hand, it had cash of HK$8.18m and HK$150.6m worth of receivables due within a year. So it actually has HK$84.7m 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. Having regard to this fact, we think its balance sheet is as strong as an ox. 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.

In the last year Wing Fung Group Asia had a loss before interest and tax, and actually shrunk its revenue by 24%, to HK$140m. To be frank that doesn't bode well.

Caveat Emptor

While Wing Fung Group Asia's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping HK$17m. Having said that, the balance sheet has plenty of liquid assets for now. 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. 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. To that end, you should be aware of the 2 warning signs we've spotted with Wing Fung Group Asia .

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.

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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.