Ying Kee Tea House Group (HKG:8241) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Ying Kee Tea House Group Limited (HKG:8241) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Ying Kee Tea House Group

What Is Ying Kee Tea House Group's Debt?

As you can see below, Ying Kee Tea House Group had HK$88.1m of debt at March 2021, down from HK$99.7m a year prior. However, it also had HK$3.91m in cash, and so its net debt is HK$84.2m.

How Strong Is Ying Kee Tea House Group's Balance Sheet?

According to the last reported balance sheet, Ying Kee Tea House Group had liabilities of HK$17.4m due within 12 months, and liabilities of HK$80.8m due beyond 12 months. Offsetting these obligations, it had cash of HK$3.91m as well as receivables valued at HK$982.0k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$93.4m.

This is a mountain of leverage relative to its market capitalization of HK$93.9m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Ying Kee Tea House Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Ying Kee Tea House Group made a loss at the EBIT level, and saw its revenue drop to HK$36m, which is a fall of 2.8%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Ying Kee Tea House Group produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at HK$7.6m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of HK$9.1m into a profit. In the meantime, we consider the stock very risky. 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. Be aware that Ying Kee Tea House Group is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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. 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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