We Think Hong Kong Building And Loan Agency (HKG:145) Has A Fair Chunk Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that The Hong Kong Building And Loan Agency Limited (HKG:145) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Hong Kong Building And Loan Agency

How Much Debt Does Hong Kong Building And Loan Agency Carry?

As you can see below, Hong Kong Building And Loan Agency had HK$21.7m of debt at June 2020, down from HK$1.10b a year prior. However, it does have HK$2.35m in cash offsetting this, leading to net debt of about HK$19.4m.

A Look At Hong Kong Building And Loan Agency's Liabilities

According to the last reported balance sheet, Hong Kong Building And Loan Agency had liabilities of HK$37.1m due within 12 months, and liabilities of HK$7.01m due beyond 12 months. Offsetting this, it had HK$2.35m in cash and HK$52.1m in receivables that were due within 12 months. So it can boast HK$10.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Hong Kong Building And Loan Agency could probably pay off its debt with ease, as its balance sheet is far from stretched. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Hong Kong Building And Loan Agency will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Hong Kong Building And Loan Agency made a loss at the EBIT level, and saw its revenue drop to HK$26m, which is a fall of 57%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Hong Kong Building And Loan Agency's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable HK$44m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. So it seems too risky for our taste. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 5 warning signs for Hong Kong Building And Loan Agency you should be aware of, and 3 of them are potentially serious.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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.
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