Does Heng Tai Consumables Group (HKG:197) Have A Healthy Balance Sheet?

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.' 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 Heng Tai Consumables Group Limited (HKG:197) does have debt on its balance sheet. 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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Heng Tai Consumables Group

What Is Heng Tai Consumables Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Heng Tai Consumables Group had HK$13.0m of debt, an increase on HK$10.5m, over one year. But on the other hand it also has HK$294.7m in cash, leading to a HK$281.7m net cash position.

A Look At Heng Tai Consumables Group's Liabilities

According to the last reported balance sheet, Heng Tai Consumables Group had liabilities of HK$97.6m due within 12 months, and liabilities of HK$19.3m due beyond 12 months. Offsetting this, it had HK$294.7m in cash and HK$275.2m in receivables that were due within 12 months. So it actually has HK$453.0m more liquid assets than total liabilities.

This luscious liquidity implies that Heng Tai Consumables Group's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Heng Tai Consumables Group has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Heng Tai Consumables Group 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 Heng Tai Consumables Group wasn't profitable at an EBIT level, but managed to grow its revenue by 7.9%, to HK$515m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Heng Tai Consumables Group?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Heng Tai Consumables Group had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of HK$109m and booked a HK$270m accounting loss. However, it has net cash of HK$281.7m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Heng Tai Consumables Group has 4 warning signs we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.