Is Ying Hai Group Holdings (HKG:8668) Using Debt In A Risky Way?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Ying Hai Group Holdings Company Limited (HKG:8668) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Ying Hai Group Holdings

How Much Debt Does Ying Hai Group Holdings Carry?

As you can see below, at the end of June 2021, Ying Hai Group Holdings had HK$11.9m of debt, up from HK$4.88m a year ago. Click the image for more detail. But it also has HK$15.6m in cash to offset that, meaning it has HK$3.69m net cash.

A Look At Ying Hai Group Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Ying Hai Group Holdings had liabilities of HK$8.34m due within 12 months and liabilities of HK$8.30m due beyond that. Offsetting this, it had HK$15.6m in cash and HK$4.69m in receivables that were due within 12 months. So it actually has HK$3.67m more liquid assets than total liabilities.

Having regard to Ying Hai Group Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the HK$204.0m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Ying Hai Group 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 Ying Hai Group 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 Ying Hai Group Holdings had a loss before interest and tax, and actually shrunk its revenue by 78%, to HK$13m. To be frank that doesn't bode well.

So How Risky Is Ying Hai Group Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Ying Hai Group Holdings had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of HK$45m and booked a HK$22m accounting loss. With only HK$3.69m 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. However, not all investment risk resides within the balance sheet - far from it. Be aware that Ying Hai Group Holdings is showing 4 warning signs in our investment analysis , and 2 of those are concerning...

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.

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.

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