Hang Tai Yue Group Holdings (HKG:8081) Is Making Moderate Use Of 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 Hang Tai Yue Group Holdings Limited (HKG:8081) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Hang Tai Yue Group Holdings

How Much Debt Does Hang Tai Yue Group Holdings Carry?

The image below, which you can click on for greater detail, shows that at June 2021 Hang Tai Yue Group Holdings had debt of HK$311.9m, up from HK$242.2m in one year. On the flip side, it has HK$208.7m in cash leading to net debt of about HK$103.2m.

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$929.5m due within 12 months and liabilities of HK$46.7m due beyond that. Offsetting this, it had HK$208.7m in cash and HK$425.9m in receivables that were due within 12 months. So its liabilities total HK$341.6m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Hang Tai Yue Group Holdings has a market capitalization of HK$571.0m, 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. 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.

In the last year Hang Tai Yue Group Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 125%, to HK$1.6b. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

Despite the top line growth, Hang Tai Yue Group Holdings still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping HK$69m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through HK$117m of cash over the last year. So suffice it to say we consider the stock very 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 3 warning signs for Hang Tai Yue Group Holdings 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.
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