Hin Sang Group (International) Holding (HKG:6893) Has Debt But No Earnings; Should You Worry?

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. We can see that Hin Sang Group (International) Holding Co. Ltd. (HKG:6893) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Hin Sang Group (International) Holding

What Is Hin Sang Group (International) Holding's Debt?

You can click the graphic below for the historical numbers, but it shows that Hin Sang Group (International) Holding had HK$318.6m of debt in March 2022, down from HK$336.8m, one year before. However, it does have HK$18.1m in cash offsetting this, leading to net debt of about HK$300.6m.

A Look At Hin Sang Group (International) Holding's Liabilities

According to the last reported balance sheet, Hin Sang Group (International) Holding had liabilities of HK$190.7m due within 12 months, and liabilities of HK$201.3m due beyond 12 months. Offsetting this, it had HK$18.1m in cash and HK$16.4m in receivables that were due within 12 months. So it has liabilities totalling HK$357.5m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's HK$333.0m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But it is Hin Sang Group (International) Holding'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 Hin Sang Group (International) Holding's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Hin Sang Group (International) Holding produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at HK$16m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of HK$12m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be 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 Hin Sang Group (International) Holding is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.