Hing Lee (HK) Holdings (HKG:396) Is Carrying A Fair Bit Of Debt

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 Hing Lee (HK) Holdings Limited (HKG:396) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Hing Lee (HK) Holdings

How Much Debt Does Hing Lee (HK) Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Hing Lee (HK) Holdings had HK$70.9m of debt in December 2022, down from HK$81.8m, one year before. However, it also had HK$38.1m in cash, and so its net debt is HK$32.8m.

How Healthy Is Hing Lee (HK) Holdings' Balance Sheet?

We can see from the most recent balance sheet that Hing Lee (HK) Holdings had liabilities of HK$97.1m falling due within a year, and liabilities of HK$6.35m due beyond that. Offsetting these obligations, it had cash of HK$38.1m as well as receivables valued at HK$23.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$42.4m.

This deficit is considerable relative to its market capitalization of HK$68.7m, so it does suggest shareholders should keep an eye on Hing Lee (HK) Holdings' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hing Lee (HK) 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 Hing Lee (HK) Holdings had a loss before interest and tax, and actually shrunk its revenue by 43%, to HK$100m. To be frank that doesn't bode well.

Caveat Emptor

While Hing Lee (HK) Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping HK$6.9m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of HK$27m. So to be blunt we do think it is risky. 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. Be aware that Hing Lee (HK) Holdings is showing 2 warning signs in our investment analysis , 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.