Hong Kong Food Investment Holdings (HKG:60) Has Debt But No Earnings; Should You Worry?

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.' 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. We note that Hong Kong Food Investment Holdings Limited (HKG:60) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. 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.

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 at September 2021 Hong Kong Food Investment Holdings had debt of HK$35.2m, up from HK$22.9m in one year. However, its balance sheet shows it holds HK$143.5m in cash, so it actually has HK$108.3m net cash.

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

We can see from the most recent balance sheet that Hong Kong Food Investment Holdings had liabilities of HK$66.0m falling due within a year, and liabilities of HK$10.5m due beyond that. Offsetting these obligations, it had cash of HK$143.5m as well as receivables valued at HK$14.2m due within 12 months. So it can boast HK$81.2m more liquid assets than total liabilities.

This surplus liquidity suggests that Hong Kong Food Investment Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Hong Kong Food Investment Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Hong Kong Food Investment Holdings's earnings that will influence how the balance sheet holds up in the future. 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 Hong Kong Food Investment Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 26%, to HK$161m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Hong Kong Food Investment Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Hong Kong Food Investment Holdings had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of HK$10m and booked a HK$12m accounting loss. Given it only has net cash of HK$108.3m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Hong Kong Food Investment Holdings may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. For example Hong Kong Food Investment Holdings has 2 warning signs (and 1 which doesn't sit too well with us) 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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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.