Would Hin Sang Group (International) Holding (HKG:6893) Be Better Off With Less Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Hin Sang Group (International) Holding Co. Ltd. (HKG:6893) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

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

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

As you can see below, at the end of September 2020, Hin Sang Group (International) Holding had HK$313.7m of debt, up from HK$181.0m a year ago. Click the image for more detail. However, it does have HK$16.9m in cash offsetting this, leading to net debt of about HK$296.8m.

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

Zooming in on the latest balance sheet data, we can see that Hin Sang Group (International) Holding had liabilities of HK$108.0m due within 12 months and liabilities of HK$236.7m due beyond that. Offsetting this, it had HK$16.9m in cash and HK$12.9m in receivables that were due within 12 months. So it has liabilities totalling HK$314.9m more than its cash and near-term receivables, combined.

Hin Sang Group (International) Holding has a market capitalization of HK$567.7m, so it could very likely raise cash to ameliorate 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. 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 Hin Sang Group (International) Holding will need earnings to service that debt. 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 made a loss at the EBIT level, and saw its revenue drop to HK$149m, which is a fall of 17%. That's not what we would hope to see.

Caveat Emptor

While Hin Sang Group (International) Holding's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. 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. Another cause for caution is that is bled HK$146m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Like risks, for instance. Every company has them, and we've spotted 4 warning signs for Hin Sang Group (International) Holding (of which 2 make us uncomfortable!) you should know about.

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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