Is Win Hanverky Holdings (HKG:3322) A Risky Investment?

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.' 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. As with many other companies Win Hanverky Holdings Limited (HKG:3322) makes use of debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Win Hanverky Holdings

What Is Win Hanverky Holdings's Debt?

As you can see below, Win Hanverky Holdings had HK$823.8m of debt at June 2022, down from HK$911.8m a year prior. On the flip side, it has HK$336.7m in cash leading to net debt of about HK$487.1m.

How Healthy Is Win Hanverky Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Win Hanverky Holdings had liabilities of HK$1.65b due within 12 months and liabilities of HK$213.7m due beyond that. Offsetting this, it had HK$336.7m in cash and HK$610.7m in receivables that were due within 12 months. So its liabilities total HK$915.3m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$321.1m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Win Hanverky Holdings would likely require a major re-capitalisation if it had to pay its creditors today. 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 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.

Over 12 months, Win Hanverky Holdings reported revenue of HK$4.3b, which is a gain of 3.5%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Win Hanverky Holdings produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable HK$72m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized HK$128m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Win Hanverky Holdings (1 is significant) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.