In This Article:
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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Wan Kei Group Holdings Limited (HKG:1718) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
See our latest analysis for Wan Kei Group Holdings
How Much Debt Does Wan Kei Group Holdings Carry?
As you can see below, at the end of September 2019, Wan Kei Group Holdings had HK$203.4m of debt, up from HK$173.8m a year ago. Click the image for more detail. But it also has HK$359.8m in cash to offset that, meaning it has HK$156.4m net cash.
How Strong Is Wan Kei Group Holdings's Balance Sheet?
According to the last reported balance sheet, Wan Kei Group Holdings had liabilities of HK$247.1m due within 12 months, and liabilities of HK$2.38m due beyond 12 months. On the other hand, it had cash of HK$359.8m and HK$120.8m worth of receivables due within a year. So it can boast HK$231.1m more liquid assets than total liabilities.
This luscious liquidity implies that Wan Kei Group Holdings's balance sheet is sturdy like a giant sequoia tree. On this view, it seems its balance sheet is as strong as a black-belt karate master. Simply put, the fact that Wan Kei Group Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Wan Kei 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.
In the last year Wan Kei Group Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by43%, to HK$237m. Shareholders probably have their fingers crossed that it can grow its way to profits.