Does Win Hanverky Holdings (HKG:3322) Have A Healthy Balance Sheet?

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.' 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. We can see that Win Hanverky Holdings Limited (HKG:3322) does use debt in its business. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Win Hanverky Holdings

What Is Win Hanverky Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Win Hanverky Holdings had HK$548.4m of debt in June 2023, down from HK$823.8m, one year before. However, because it has a cash reserve of HK$361.4m, its net debt is less, at about HK$187.0m.

How Healthy Is Win Hanverky Holdings' Balance Sheet?

We can see from the most recent balance sheet that Win Hanverky Holdings had liabilities of HK$1.14b falling due within a year, and liabilities of HK$131.7m due beyond that. Offsetting these obligations, it had cash of HK$361.4m as well as receivables valued at HK$527.5m due within 12 months. So its liabilities total HK$379.0m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$197.8m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Win Hanverky Holdings would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Win Hanverky Holdings 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 Win Hanverky Holdings had a loss before interest and tax, and actually shrunk its revenue by 11%, to HK$3.9b. That's not what we would hope to see.

Caveat Emptor

Not only did Win Hanverky Holdings'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$203m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of HK$174m. And until that time we think this is a risky stock. 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. We've identified 2 warning signs with Win Hanverky Holdings (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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.