Hong Lai Huat Group (SGX:CTO) Is Carrying A Fair Bit 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. We can see that Hong Lai Huat Group Limited (SGX:CTO) does use debt in its business. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Hong Lai Huat Group

How Much Debt Does Hong Lai Huat Group Carry?

As you can see below, at the end of December 2023, Hong Lai Huat Group had S$10.9m of debt, up from S$4.60m a year ago. Click the image for more detail. On the flip side, it has S$3.98m in cash leading to net debt of about S$6.91m.

How Healthy Is Hong Lai Huat Group's Balance Sheet?

The latest balance sheet data shows that Hong Lai Huat Group had liabilities of S$11.0m due within a year, and liabilities of S$11.1m falling due after that. Offsetting this, it had S$3.98m in cash and S$949.0k in receivables that were due within 12 months. So its liabilities total S$17.1m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of S$28.0m, so it does suggest shareholders should keep an eye on Hong Lai Huat Group's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Hong Lai Huat Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

It seems likely shareholders hope that Hong Lai Huat Group can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

Caveat Emptor

While Hong Lai Huat Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping S$8.0m. 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 S$5.8m of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Hong Lai Huat Group has 5 warning signs (and 4 which can't be ignored) we think you should know about.

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.

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

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.