These 4 Measures Indicate That Win Hanverky Holdings (HKG:3322) Is Using Debt Extensively

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Win Hanverky Holdings Limited (HKG:3322) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Our free stock report includes 2 warning signs investors should be aware of before investing in Win Hanverky Holdings. Read for free now.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 step when considering a company's debt levels is to consider its cash and debt together.

What Is Win Hanverky Holdings's Debt?

The chart below, which you can click on for greater detail, shows that Win Hanverky Holdings had HK$465.0m in debt in December 2024; about the same as the year before. However, it also had HK$250.3m in cash, and so its net debt is HK$214.7m.

How Strong Is Win Hanverky Holdings' Balance Sheet?

We can see from the most recent balance sheet that Win Hanverky Holdings had liabilities of HK$1.21b falling due within a year, and liabilities of HK$147.2m due beyond that. Offsetting this, it had HK$250.3m in cash and HK$622.8m in receivables that were due within 12 months. So its liabilities total HK$479.4m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$301.8m 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.

View our latest analysis for Win Hanverky Holdings

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

While Win Hanverky Holdings has a quite reasonable net debt to EBITDA multiple of 1.7, its interest cover seems weak, at 0.58. The main reason for this is that it has such high depreciation and amortisation. While companies often boast that these charges are non-cash, most such businesses will therefore require ongoing investment (that is not expensed.) Either way there's no doubt the stock is using meaningful leverage. Notably, Win Hanverky Holdings made a loss at the EBIT level, last year, but improved that to positive EBIT of HK$26m in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Win Hanverky Holdings'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the last year, Win Hanverky Holdings actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

To be frank both Win Hanverky Holdings's level of total liabilities and its track record of covering its interest expense with its EBIT make us rather uncomfortable with its debt levels. But at least it's pretty decent at converting EBIT to free cash flow; that's encouraging. Once we consider all the factors above, together, it seems to us that Win Hanverky Holdings's debt is making it a bit risky. That's not necessarily a bad thing, but we'd generally feel more comfortable with less leverage. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Win Hanverky Holdings (of which 1 is significant!) you should know about.

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.