Health Check: How Prudently Does Hong Kong Food Investment Holdings (HKG:60) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Hong Kong Food Investment Holdings Limited (HKG:60) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Hong Kong Food Investment Holdings

How Much Debt Does Hong Kong Food Investment Holdings Carry?

The image below, which you can click on for greater detail, shows that Hong Kong Food Investment Holdings had debt of HK$22.4m at the end of March 2023, a reduction from HK$35.2m over a year. However, it does have HK$87.9m in cash offsetting this, leading to net cash of HK$65.5m.

How Strong Is Hong Kong Food Investment Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hong Kong Food Investment Holdings had liabilities of HK$54.8m due within 12 months and liabilities of HK$14.6m due beyond that. Offsetting these obligations, it had cash of HK$87.9m as well as receivables valued at HK$20.9m due within 12 months. So it can boast HK$39.4m more liquid assets than total liabilities.

This surplus suggests that Hong Kong Food Investment Holdings is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Hong Kong Food Investment Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hong Kong Food Investment 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.

In the last year Hong Kong Food Investment Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 26%, to HK$232m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Hong Kong Food Investment Holdings?

Although Hong Kong Food Investment Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of HK$1.1m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We think its revenue growth of 26% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a stock. 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. Be aware that Hong Kong Food Investment Holdings is showing 3 warning signs in our investment analysis , and 1 of those is potentially serious...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.