Would Winfull Group Holdings (HKG:183) Be Better Off With Less Debt?

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.' 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. We can see that Winfull Group Holdings Limited (HKG:183) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Winfull Group Holdings

What Is Winfull Group Holdings's Net Debt?

As you can see below, Winfull Group Holdings had HK$184.3m of debt at June 2023, down from HK$220.6m a year prior. On the flip side, it has HK$147.3m in cash leading to net debt of about HK$37.0m.

How Strong Is Winfull Group Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Winfull Group Holdings had liabilities of HK$214.7m due within 12 months and liabilities of HK$7.57m due beyond that. Offsetting this, it had HK$147.3m in cash and HK$1.62m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$73.4m.

This is a mountain of leverage relative to its market capitalization of HK$106.6m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe 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 Winfull Group Holdings 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, Winfull Group Holdings reported revenue of HK$38m, which is a gain of 44%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Winfull Group Holdings still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost HK$9.2m 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. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of HK$68m. So we do think this stock is quite 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 example, we've discovered 3 warning signs for Winfull Group Holdings (1 can't be ignored!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.