Is Hanvey Group Holdings (HKG:8219) Using Too Much 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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Hanvey Group Holdings Limited (HKG:8219) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Hanvey Group Holdings

What Is Hanvey Group Holdings's Net Debt?

As you can see below, at the end of December 2020, Hanvey Group Holdings had HK$105.1m of debt, up from HK$44.2m a year ago. Click the image for more detail. On the flip side, it has HK$36.0m in cash leading to net debt of about HK$69.1m.

A Look At Hanvey Group Holdings' Liabilities

We can see from the most recent balance sheet that Hanvey Group Holdings had liabilities of HK$118.9m falling due within a year, and liabilities of HK$51.6m due beyond that. On the other hand, it had cash of HK$36.0m and HK$24.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$110.1m.

This deficit casts a shadow over the HK$72.0m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Hanvey Group Holdings would likely require a major re-capitalisation if it had to pay its creditors today. 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$139m, which is a fall of 30%. 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$19m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of HK$18m over the last twelve months. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Hanvey Group Holdings has 3 warning signs (and 2 which are 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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