Win Hanverky Holdings (HKG:3322) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 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?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Win Hanverky Holdings

What Is Win Hanverky Holdings's Debt?

The image below, which you can click on for greater detail, shows that Win Hanverky Holdings had debt of HK$472.8m at the end of December 2023, a reduction from HK$794.1m over a year. On the flip side, it has HK$209.5m in cash leading to net debt of about HK$263.3m.

How Healthy Is Win Hanverky Holdings' Balance Sheet?

The latest balance sheet data shows that Win Hanverky Holdings had liabilities of HK$1.20b due within a year, and liabilities of HK$191.2m falling due after that. Offsetting this, it had HK$209.5m in cash and HK$713.5m in receivables that were due within 12 months. So it has liabilities totalling HK$466.3m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$156.7m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Win Hanverky Holdings would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Win Hanverky Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Win Hanverky Holdings had a loss before interest and tax, and actually shrunk its revenue by 31%, to HK$3.1b. To be frank that doesn't bode well.

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$253m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost HK$255m in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Win Hanverky Holdings (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

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.