Hang Tai Yue Group Holdings (HKG:8081) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Hang Tai Yue Group Holdings Limited (HKG:8081) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Hang Tai Yue Group Holdings

What Is Hang Tai Yue Group Holdings's Net Debt?

As you can see below, at the end of December 2020, Hang Tai Yue Group Holdings had HK$280.0m of debt, up from HK$221.8m a year ago. Click the image for more detail. However, its balance sheet shows it holds HK$295.5m in cash, so it actually has HK$15.6m net cash.

How Healthy Is Hang Tai Yue Group Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hang Tai Yue Group Holdings had liabilities of HK$820.9m due within 12 months and liabilities of HK$53.1m due beyond that. On the other hand, it had cash of HK$295.5m and HK$418.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$160.4m.

While this might seem like a lot, it is not so bad since Hang Tai Yue Group Holdings has a market capitalization of HK$389.5m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Hang Tai Yue Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Hang Tai Yue Group 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.

In the last year Hang Tai Yue Group Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 64%, to HK$1.1b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Hang Tai Yue Group Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Hang Tai Yue Group Holdings lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of HK$122m and booked a HK$73m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of HK$15.6m. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Hang Tai Yue Group Holdings may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Hang Tai Yue Group Holdings that 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.

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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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