Is Hang Tai Yue Group Holdings (HKG:8081) A Risky Investment?

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.' 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, Hang Tai Yue Group Holdings Limited (HKG:8081) does carry debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Hang Tai Yue Group Holdings

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

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$385.2m, 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$176.5m.

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

The latest balance sheet data shows that Hang Tai Yue Group Holdings had liabilities of HK$929.5m due within a year, and liabilities of HK$46.7m falling due after that. On the other hand, it had cash of HK$208.7m and HK$425.9m worth of receivables due within a year. So it has liabilities totalling HK$341.6m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of HK$549.6m, so it does suggest shareholders should keep an eye on Hang Tai Yue Group Holdings' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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.

Over 12 months, Hang Tai Yue Group Holdings reported revenue of HK$1.8b, which is a gain of 127%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

While we can certainly appreciate Hang Tai Yue Group Holdings's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping HK$82m. 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. Another cause for caution is that is bled HK$117m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Hang Tai Yue Group Holdings 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. 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.