Is Winning Tower Group Holdings (HKG:8362) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Winning Tower Group Holdings Limited (HKG:8362) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Winning Tower Group Holdings

How Much Debt Does Winning Tower Group Holdings Carry?

As you can see below, at the end of December 2021, Winning Tower Group Holdings had HK$32.5m of debt, up from HK$23.1m a year ago. Click the image for more detail. However, because it has a cash reserve of HK$23.1m, its net debt is less, at about HK$9.37m.

How Strong Is Winning Tower Group Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Winning Tower Group Holdings had liabilities of HK$19.7m due within 12 months and liabilities of HK$28.8m due beyond that. On the other hand, it had cash of HK$23.1m and HK$10.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$15.1m.

This deficit isn't so bad because Winning Tower Group Holdings is worth HK$50.4m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Winning Tower Group 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 Winning Tower Group Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 31%, to HK$95m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Winning Tower Group Holdings managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping HK$15m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled HK$826k in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Winning Tower Group Holdings (2 are a bit concerning) you should be aware of.

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.