Stock Analysis

Is Hung Hing Printing Group (HKG:450) A Risky Investment?

SEHK:450
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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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Hung Hing Printing Group Limited (HKG:450) makes use of debt. 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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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

How Much Debt Does Hung Hing Printing Group Carry?

As you can see below, Hung Hing Printing Group had HK$191.6m of debt, at December 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have HK$1.25b in cash offsetting this, leading to net cash of HK$1.05b.

debt-equity-history-analysis
SEHK:450 Debt to Equity History May 31st 2023

How Strong Is Hung Hing Printing Group's Balance Sheet?

We can see from the most recent balance sheet that Hung Hing Printing Group had liabilities of HK$675.4m falling due within a year, and liabilities of HK$119.7m due beyond that. Offsetting these obligations, it had cash of HK$1.25b as well as receivables valued at HK$534.0m due within 12 months. So it actually has HK$985.0m more liquid assets than total liabilities.

This surplus liquidity suggests that Hung Hing Printing Group's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Hung Hing Printing Group boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Hung Hing Printing Group's load is not too heavy, because its EBIT was down 55% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hung Hing Printing Group'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.

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. During the last three years, Hung Hing Printing Group generated free cash flow amounting to a very robust 88% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hung Hing Printing Group has HK$1.05b in net cash and a strong balance sheet. And it impressed us with free cash flow of HK$286m, being 88% of its EBIT. So we don't think Hung Hing Printing Group's use of debt is risky. 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 instance, we've identified 3 warning signs for Hung Hing Printing Group (1 is potentially serious) you should be aware of.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Hung Hing Printing Group is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.

About SEHK:450

Hung Hing Printing Group

An investment holding company, engages in book and package printing, consumer product packaging, corrugated box, and paper trading in the People’s Republic of China, the United States, Hong Kong, the United Kingdom, and internationally.

Excellent balance sheet with proven track record and pays a dividend.