Is HKC International Holdings (HKG:248) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies HKC International Holdings Limited (HKG:248) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for HKC International Holdings

What Is HKC International Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 HKC International Holdings had HK$122.5m of debt, an increase on HK$94.5m, over one year. However, it does have HK$34.4m in cash offsetting this, leading to net debt of about HK$88.1m.

How Strong Is HKC International Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that HKC International Holdings had liabilities of HK$131.1m due within 12 months and liabilities of HK$125.0k due beyond that. Offsetting these obligations, it had cash of HK$34.4m as well as receivables valued at HK$79.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$16.9m.

While this might seem like a lot, it is not so bad since HKC International Holdings has a market capitalization of HK$62.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is HKC International Holdings's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, HKC International Holdings made a loss at the EBIT level, and saw its revenue drop to HK$183m, which is a fall of 24%. That makes us nervous, to say the least.

Caveat Emptor

Not only did HKC International Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at HK$756k. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled HK$2.4m in negative free cash flow over the last twelve months. So to be blunt we 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for HKC International Holdings (of which 1 is significant!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.