Hang Tai Yue Group Holdings (HKG:8081) Is Carrying A Fair Bit Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Hang Tai Yue Group Holdings Limited (HKG:8081) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Debt?

As you can see below, Hang Tai Yue Group Holdings had HK$74.3m of debt at December 2023, down from HK$123.0m a year prior. However, it also had HK$72.6m in cash, and so its net debt is HK$1.70m.

How Strong 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$96.0m due within 12 months and liabilities of HK$28.6m due beyond that. Offsetting this, it had HK$72.6m in cash and HK$54.3m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Hang Tai Yue Group Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the HK$355.8m company is struggling for cash, we still think it's worth monitoring its balance sheet. Carrying virtually no net debt, Hang Tai Yue Group Holdings has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Hang Tai Yue Group Holdings will need earnings to service that debt. 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, Hang Tai Yue Group Holdings made a loss at the EBIT level, and saw its revenue drop to HK$65m, which is a fall of 52%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Hang Tai Yue Group 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$31m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. And the cherry on top is that its actual free cash flow was HK$12m with statutory profit coming in at HK$13m. So it seems too risky for our taste. 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. To that end, you should be aware of the 4 warning signs we've spotted with Hang Tai Yue Group Holdings .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com