Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Above all, Hin Sang Group (International) Holding Co. Ltd. (HKG:6893) is in debt. But should shareholders worry about its use of debt?
When is debt dangerous?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for Hin Sang Group (International) Holding
What is the net debt of Hin Sang Group (International) Holding?
You can click on the graph below for historical figures, but it shows that as of September 2021, Hin Sang Group (International) Holding had debt of HK$336.0 million, up from 313, HK$7 million, over one year. On the other hand, he has HK$18.2 million in cash, resulting in a net debt of around HK$317.8 million.
How healthy is Hin Sang Group (International) Holding’s balance sheet?
According to the latest published balance sheet, Hin Sang Group (International) Holding had liabilities of HK$169.1 million due within 12 months and liabilities of HK$213.5 million due beyond 12 months. As compensation for these obligations, it had liquid assets of HK$18.2 million as well as receivables valued at HK$13.8 million and payable within 12 months. It therefore has liabilities totaling HK$350.6 million more than its cash and short-term receivables, combined.
This deficit is sizable compared to its market capitalization of HK$360.3 million, so it suggests shareholders should monitor Hin Sang Group (International) Holding’s use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet quickly. There is no doubt that we learn the most about debt from the balance sheet. But it is the profits of Hin Sang Group (International) Holding that will influence the balance sheet in the future. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
Year-on-year, Hin Sang Group (International) Holding posted a loss in EBIT and saw its revenue drop to HK$98 million, a decline of 34%. To be honest, that doesn’t bode well.
Caveat Emptor
Not only has Hin Sang Group (International) Holding’s revenue dropped over the past twelve months, it has also produced negative earnings before interest and taxes (EBIT). Its EBIT loss was HK$41 million. When we look at this and recall the liabilities on its balance sheet, versus cash, it seems unwise to us that the company has debt. Quite frankly, we think the track record falls short, although it could improve over time. Another reason for caution is that it has lost HK$75 million in negative free cash flow over the past twelve months. So suffice it to say that we consider the stock to be very risky. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. For example, we have identified 3 warning signs for Hin Sang Group (International) Holding (2 are concerning) that you should be aware of.
If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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