Hop Fung Group Holdings (HKG:2320) 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.' 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. We note that Hop Fung Group Holdings Limited (HKG:2320) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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.

View our latest analysis for Hop Fung Group Holdings

How Much Debt Does Hop Fung Group Holdings Carry?

As you can see below, at the end of June 2024, Hop Fung Group Holdings had HK$89.9m of debt, up from HK$53.1m a year ago. Click the image for more detail. However, because it has a cash reserve of HK$56.9m, its net debt is less, at about HK$33.0m.

A Look At Hop Fung Group Holdings' Liabilities

We can see from the most recent balance sheet that Hop Fung Group Holdings had liabilities of HK$96.9m falling due within a year, and liabilities of HK$92.7m due beyond that. Offsetting these obligations, it had cash of HK$56.9m as well as receivables valued at HK$37.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$94.8m.

When you consider that this deficiency exceeds the company's HK$65.4m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Hop Fung Group Holdings'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 Hop Fung Group Holdings had a loss before interest and tax, and actually shrunk its revenue by 22%, to HK$226m. That makes us nervous, to say the least.

Caveat Emptor

While Hop Fung Group Holdings'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$97m. 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. Not least because it had negative free cash flow of HK$29m over the last twelve months. That means it's on the risky side of things. 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. To that end, you should be aware of the 2 warning signs we've spotted with Hop Fung Group Holdings .

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.