Is Hong Kong Food Investment Holdings (HKG:60) Using Debt Sensibly?

Warren Buffett famously said, '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 can see that Hong Kong Food Investment Holdings Limited (HKG:60) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at 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 chart below, which you can click on for greater detail, shows that Hong Kong Food Investment Holdings had HK$21.2m in debt in March 2021; about the same as the year before. But it also has HK$152.1m in cash to offset that, meaning it has HK$130.9m net cash.

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

The latest balance sheet data shows that Hong Kong Food Investment Holdings had liabilities of HK$45.6m due within a year, and liabilities of HK$13.6m falling due after that. Offsetting these obligations, it had cash of HK$152.1m as well as receivables valued at HK$10.2m due within 12 months. So it can boast HK$103.2m more liquid assets than total liabilities.

This excess liquidity is a great indication that Hong Kong Food Investment Holdings' balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Hong Kong Food Investment Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! 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.

Over 12 months, Hong Kong Food Investment Holdings made a loss at the EBIT level, and saw its revenue drop to HK$131m, which is a fall of 6.4%. That's not what we would hope to see.

So How Risky Is Hong Kong Food Investment Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Hong Kong Food Investment Holdings lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of HK$10m and booked a HK$4.2m accounting loss. With only HK$130.9m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Hong Kong Food Investment Holdings (of which 1 is potentially serious!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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.
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