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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. 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?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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?

As you can see below, Hang Tai Yue Group Holdings had HK$131.2m of debt at December 2022, down from HK$153.0m a year prior. However, because it has a cash reserve of HK$116.9m, its net debt is less, at about HK$14.3m.

A Look At Hang Tai Yue Group Holdings' Liabilities

We can see from the most recent balance sheet that Hang Tai Yue Group Holdings had liabilities of HK$255.0m falling due within a year, and liabilities of HK$43.9m due beyond that. On the other hand, it had cash of HK$116.9m and HK$40.9m worth of receivables due within a year. So it has liabilities totalling HK$141.1m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Hang Tai Yue Group Holdings has a market capitalization of HK$474.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. 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 had a loss before interest and tax, and actually shrunk its revenue by 94%, to HK$96m. 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$44m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through HK$6.0m of cash over the last year. So suffice it to say we do consider the stock to be 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. For example, we've discovered 2 warning signs for Hang Tai Yue Group Holdings that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.