Is Hanvey Group Holdings (HKG:8219) Using Debt In A Risky Way?

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 Hanvey Group Holdings Limited (HKG:8219) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. 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

How Much Debt Does Hanvey Group Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Hanvey Group Holdings had HK$90.8m of debt, an increase on HK$44.2m, over one year. However, it does have HK$32.9m in cash offsetting this, leading to net debt of about HK$57.8m.

A Look At Hanvey Group Holdings's Liabilities

Zooming in on the latest balance sheet data, we can see that Hanvey Group Holdings had liabilities of HK$138.7m due within 12 months and liabilities of HK$52.4m due beyond that. Offsetting this, it had HK$32.9m in cash and HK$42.4m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$115.9m.

The deficiency here weighs heavily on the HK$75.0m 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. At the end of the day, Hanvey Group Holdings would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Hanvey Group 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.

Over 12 months, Hanvey Group Holdings made a loss at the EBIT level, and saw its revenue drop to HK$150m, which is a fall of 27%. 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$22m 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. It's fair to say the loss of HK$26m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Hanvey Group Holdings has 3 warning signs (and 2 which are a bit concerning) we think 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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