Is Hanvey Group Holdings (HKG:8219) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Hanvey Group Holdings Limited (HKG:8219) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Hanvey Group Holdings

What Is Hanvey Group Holdings's Debt?

As you can see below, at the end of December 2023, Hanvey Group Holdings had HK$122.0m of debt, up from HK$104.9m a year ago. Click the image for more detail. However, it does have HK$75.6m in cash offsetting this, leading to net debt of about HK$46.4m.

How Strong Is Hanvey Group Holdings' Balance Sheet?

We can see from the most recent balance sheet that Hanvey Group Holdings had liabilities of HK$130.9m falling due within a year, and liabilities of HK$53.9m due beyond that. Offsetting these obligations, it had cash of HK$75.6m as well as receivables valued at HK$18.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$90.7m.

The deficiency here weighs heavily on the HK$51.2m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Hanvey Group Holdings would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Hanvey Group 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.

Over 12 months, Hanvey Group Holdings made a loss at the EBIT level, and saw its revenue drop to HK$186m, which is a fall of 32%. To be frank that doesn't bode well.

Caveat Emptor

While Hanvey Group 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. Indeed, it lost a very considerable HK$9.4m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of HK$7.2m over the last twelve months. So suffice it to say we consider the stock to be risky. 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. Be aware that Hanvey Group Holdings is showing 2 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.