Hung Hing Printing Group (HKG:450) Has A Rock Solid Balance Sheet

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Hung Hing Printing Group Limited (HKG:450) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Hung Hing Printing Group

What Is Hung Hing Printing Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Hung Hing Printing Group had HK$120.8m of debt in December 2020, down from HK$133.9m, one year before. But on the other hand it also has HK$1.36b in cash, leading to a HK$1.24b net cash position.

A Look At Hung Hing Printing Group's Liabilities

According to the last reported balance sheet, Hung Hing Printing Group had liabilities of HK$577.6m due within 12 months, and liabilities of HK$174.5m due beyond 12 months. Offsetting these obligations, it had cash of HK$1.36b as well as receivables valued at HK$840.4m due within 12 months. So it can boast HK$1.45b more liquid assets than total liabilities.

This excess liquidity is a great indication that Hung Hing Printing Group's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Hung Hing Printing Group has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Hung Hing Printing Group grew its EBIT by 42% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Hung Hing Printing Group will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Hung Hing Printing Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, Hung Hing Printing Group actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Hung Hing Printing Group has HK$1.24b in net cash and a strong balance sheet. And it impressed us with free cash flow of HK$250m, being 153% of its EBIT. At the end of the day we're not concerned about Hung Hing Printing Group's debt. 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. Case in point: We've spotted 2 warning signs for Hung Hing Printing Group you should be aware of, and 1 of them is a bit unpleasant.

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. 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.
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