Health Check: How Prudently Does Hong Lai Huat Group (SGX:CTO) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Hong Lai Huat Group Limited (SGX:CTO) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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.

Check out our latest analysis for Hong Lai Huat Group

What Is Hong Lai Huat Group's Net Debt?

The image below, which you can click on for greater detail, shows that Hong Lai Huat Group had debt of S$4.10m at the end of June 2022, a reduction from S$5.95m over a year. However, its balance sheet shows it holds S$21.3m in cash, so it actually has S$17.2m net cash.

A Look At Hong Lai Huat Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Hong Lai Huat Group had liabilities of S$9.92m due within 12 months and liabilities of S$12.3m due beyond that. Offsetting these obligations, it had cash of S$21.3m as well as receivables valued at S$1.55m due within 12 months. So it can boast S$647.0k more liquid assets than total liabilities.

This state of affairs indicates that Hong Lai Huat Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the S$32.6m company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Hong Lai Huat Group boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Hong Lai Huat Group 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, Hong Lai Huat Group made a loss at the EBIT level, and saw its revenue drop to S$5.4m, which is a fall of 61%. To be frank that doesn't bode well.

So How Risky Is Hong Lai Huat Group?

Although Hong Lai Huat Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of S$4.9m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 6 warning signs for Hong Lai Huat Group (1 is concerning) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.