Is Yu Tak International Holdings (HKG:8048) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Yu Tak International Holdings Limited (HKG:8048) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Yu Tak International Holdings

What Is Yu Tak International Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Yu Tak International Holdings had debt of HK$12.5m, up from HK$5.78m in one year. But on the other hand it also has HK$21.5m in cash, leading to a HK$8.93m net cash position.

How Strong Is Yu Tak International Holdings' Balance Sheet?

We can see from the most recent balance sheet that Yu Tak International Holdings had liabilities of HK$30.7m falling due within a year, and liabilities of HK$1.09m due beyond that. Offsetting this, it had HK$21.5m in cash and HK$23.7m in receivables that were due within 12 months. So it actually has HK$13.4m more liquid assets than total liabilities.

This surplus suggests that Yu Tak International Holdings is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Yu Tak International Holdings had a loss before interest and tax, and actually shrunk its revenue by 24%, to HK$23m. To be frank that doesn't bode well.

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 in the last year Yu Tak International Holdings had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through HK$5.7m of cash and made a loss of HK$12m. While this does make the company a bit risky, it's important to remember it has net cash of HK$8.93m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Yu Tak International Holdings you should be aware of, and 1 of them is a bit concerning.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.