Would Hing Lee (HK) Holdings (HKG:396) Be Better Off With Less Debt?

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 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 Hing Lee (HK) Holdings Limited (HKG:396) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Hing Lee (HK) Holdings

What Is Hing Lee (HK) Holdings's Debt?

The image below, which you can click on for greater detail, shows that Hing Lee (HK) Holdings had debt of HK$53.8m at the end of December 2023, a reduction from HK$70.9m over a year. On the flip side, it has HK$33.5m in cash leading to net debt of about HK$20.3m.

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

The latest balance sheet data shows that Hing Lee (HK) Holdings had liabilities of HK$72.6m due within a year, and liabilities of HK$2.48m falling due after that. Offsetting these obligations, it had cash of HK$33.5m as well as receivables valued at HK$23.3m due within 12 months. So it has liabilities totalling HK$18.2m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Hing Lee (HK) Holdings has a market capitalization of HK$46.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Hing Lee (HK) 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.

In the last year Hing Lee (HK) Holdings had a loss before interest and tax, and actually shrunk its revenue by 6.2%, to HK$94m. That's not what we would hope to see.

Caveat Emptor

Importantly, Hing Lee (HK) Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable HK$5.3m at the EBIT level. 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. For example, we would not want to see a repeat of last year's loss of HK$11m. In the meantime, we consider the stock very 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. For example - Hing Lee (HK) Holdings has 2 warning signs we think you should be aware of.

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.