Is Yu Tak International Holdings (HKG:8048) A Risky Investment?

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. Importantly, Yu Tak International Holdings Limited (HKG:8048) does carry debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Yu Tak International Holdings

What Is Yu Tak International Holdings's Debt?

The image below, which you can click on for greater detail, shows that at June 2020 Yu Tak International Holdings had debt of HK$12.4m, up from HK$9.68m in one year. However, its balance sheet shows it holds HK$19.2m in cash, so it actually has HK$6.89m net cash.

How Healthy Is Yu Tak International Holdings's Balance Sheet?

The latest balance sheet data shows that Yu Tak International Holdings had liabilities of HK$23.7m due within a year, and liabilities of HK$153.0k falling due after that. Offsetting these obligations, it had cash of HK$19.2m as well as receivables valued at HK$37.5m due within 12 months. So it can boast HK$33.0m more liquid assets than total liabilities.

This surplus liquidity suggests that Yu Tak International Holdings's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Succinctly put, Yu Tak International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Yu Tak International 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.

Over 12 months, Yu Tak International Holdings made a loss at the EBIT level, and saw its revenue drop to HK$57m, which is a fall of 44%. That makes us nervous, to say the least.

So How Risky Is Yu Tak International Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Yu Tak International Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through HK$7.4m of cash and made a loss of HK$11m. However, it has net cash of HK$6.89m, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Take risks, for example - Yu Tak International Holdings has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

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. 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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