Health Check: How Prudently Does Hung Fook Tong Group Holdings (HKG:1446) Use Debt?

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.' 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. Importantly, Hung Fook Tong Group Holdings Limited (HKG:1446) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Hung Fook Tong Group Holdings

How Much Debt Does Hung Fook Tong Group Holdings Carry?

The image below, which you can click on for greater detail, shows that at June 2023 Hung Fook Tong Group Holdings had debt of HK$42.5m, up from HK$33.7m in one year. But on the other hand it also has HK$90.9m in cash, leading to a HK$48.4m net cash position.

How Healthy Is Hung Fook Tong Group Holdings' Balance Sheet?

We can see from the most recent balance sheet that Hung Fook Tong Group Holdings had liabilities of HK$368.4m falling due within a year, and liabilities of HK$86.8m due beyond that. Offsetting these obligations, it had cash of HK$90.9m as well as receivables valued at HK$63.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$300.6m.

The deficiency here weighs heavily on the HK$135.1m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Hung Fook Tong Group Holdings would likely require a major re-capitalisation if it had to pay its creditors today. Hung Fook Tong Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Hung Fook Tong Group Holdings will need earnings to service that debt. 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.

Over 12 months, Hung Fook Tong Group Holdings saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

So How Risky Is Hung Fook Tong Group Holdings?

Although Hung Fook Tong Group Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of HK$99m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Hung Fook Tong Group Holdings (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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. 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.