Is Hing Lee (HK) Holdings (HKG:396) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Hing Lee (HK) Holdings Limited (HKG:396) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Hing Lee (HK) Holdings

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

As you can see below, at the end of June 2021, Hing Lee (HK) Holdings had HK$81.2m of debt, up from HK$35.0m a year ago. Click the image for more detail. However, because it has a cash reserve of HK$64.7m, its net debt is less, at about HK$16.5m.

A Look At Hing Lee (HK) Holdings' Liabilities

According to the last reported balance sheet, Hing Lee (HK) Holdings had liabilities of HK$146.5m due within 12 months, and liabilities of HK$11.0m due beyond 12 months. On the other hand, it had cash of HK$64.7m and HK$84.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$8.77m.

Of course, Hing Lee (HK) Holdings has a market capitalization of HK$113.9m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 Hing Lee (HK) 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 Hing Lee (HK) Holdings had a loss before interest and tax, and actually shrunk its revenue by 22%, to HK$204m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Hing Lee (HK) 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$45m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled HK$28m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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 Hing Lee (HK) Holdings (of which 1 shouldn't be ignored!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.
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