Health Check: How Prudently Does Hingtex Holdings (HKG:1968) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Hingtex Holdings Limited (HKG:1968) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Hingtex Holdings

What Is Hingtex Holdings's Debt?

As you can see below, at the end of June 2024, Hingtex Holdings had HK$28.7m of debt, up from HK$27.5m a year ago. Click the image for more detail. However, its balance sheet shows it holds HK$57.9m in cash, so it actually has HK$29.2m net cash.

How Healthy Is Hingtex Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hingtex Holdings had liabilities of HK$74.1m due within 12 months and liabilities of HK$8.56m due beyond that. Offsetting these obligations, it had cash of HK$57.9m as well as receivables valued at HK$50.1m due within 12 months. So it actually has HK$25.4m more liquid assets than total liabilities.

This excess liquidity is a great indication that Hingtex Holdings' balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Hingtex Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Hingtex Holdings 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, Hingtex Holdings made a loss at the EBIT level, and saw its revenue drop to HK$180m, which is a fall of 7.4%. That's not what we would hope to see.

So How Risky Is Hingtex Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Hingtex Holdings had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of HK$21m and booked a HK$35m accounting loss. But the saving grace is the HK$29.2m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive 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 2 warning signs for Hingtex Holdings you should know about.

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.

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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.