Would Wing Fung Group Asia (HKG:8526) Be Better Off With Less Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Wing Fung Group Asia Limited (HKG:8526) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Wing Fung Group Asia

What Is Wing Fung Group Asia's Net Debt?

The image below, which you can click on for greater detail, shows that Wing Fung Group Asia had debt of HK$27.3m at the end of December 2023, a reduction from HK$38.4m over a year. However, it also had HK$6.01m in cash, and so its net debt is HK$21.3m.

A Look At Wing Fung Group Asia's Liabilities

Zooming in on the latest balance sheet data, we can see that Wing Fung Group Asia had liabilities of HK$64.9m due within 12 months and liabilities of HK$220.0k due beyond that. On the other hand, it had cash of HK$6.01m and HK$102.1m worth of receivables due within a year. So it can boast HK$43.0m 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 it is Wing Fung Group Asia'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.

In the last year Wing Fung Group Asia had a loss before interest and tax, and actually shrunk its revenue by 38%, to HK$115m. 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. Indeed, it lost a very considerable HK$28m at the EBIT level. 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. 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. To that end, you should be aware of the 3 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.