We Think Ngai Hing Hong (HKG:1047) Has A Fair Chunk Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Ngai Hing Hong Company Limited (HKG:1047) does carry debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Ngai Hing Hong

What Is Ngai Hing Hong's Debt?

The chart below, which you can click on for greater detail, shows that Ngai Hing Hong had HK$326.9m in debt in December 2023; about the same as the year before. However, because it has a cash reserve of HK$111.1m, its net debt is less, at about HK$215.8m.

How Strong Is Ngai Hing Hong's Balance Sheet?

According to the last reported balance sheet, Ngai Hing Hong had liabilities of HK$450.9m due within 12 months, and liabilities of HK$7.80m due beyond 12 months. Offsetting these obligations, it had cash of HK$111.1m as well as receivables valued at HK$250.7m due within 12 months. So it has liabilities totalling HK$96.9m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of HK$145.8m, so it does suggest shareholders should keep an eye on Ngai Hing Hong's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Ngai Hing Hong'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, Ngai Hing Hong made a loss at the EBIT level, and saw its revenue drop to HK$1.2b, which is a fall of 18%. We would much prefer see growth.

Caveat Emptor

While Ngai Hing Hong's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping HK$16m. 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. We would feel better if it turned its trailing twelve month loss of HK$36m into a profit. So to be blunt we do think it is risky. 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. Case in point: We've spotted 3 warning signs for Ngai Hing Hong you should be aware of, and 2 of them shouldn't be ignored.

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.

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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.