Hin Sang Group (International) Holding (HKG:6893) Is Carrying A Fair Bit Of Debt

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. Importantly, Hin Sang Group (International) Holding Co. Ltd. (HKG:6893) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Hin Sang Group (International) Holding

How Much Debt Does Hin Sang Group (International) Holding Carry?

The image below, which you can click on for greater detail, shows that Hin Sang Group (International) Holding had debt of HK$296.1m at the end of September 2022, a reduction from HK$336.0m over a year. However, it does have HK$14.0m in cash offsetting this, leading to net debt of about HK$282.1m.

How Healthy Is Hin Sang Group (International) Holding's Balance Sheet?

The latest balance sheet data shows that Hin Sang Group (International) Holding had liabilities of HK$187.5m due within a year, and liabilities of HK$170.4m falling due after that. Offsetting these obligations, it had cash of HK$14.0m as well as receivables valued at HK$6.38m due within 12 months. So its liabilities total HK$337.6m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of HK$414.9m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Over 12 months, Hin Sang Group (International) Holding reported revenue of HK$119m, which is a gain of 21%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Hin Sang Group (International) Holding's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost HK$14m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of HK$19m. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Hin Sang Group (International) Holding has 2 warning signs (and 1 which is potentially serious) we think you should know about.

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.