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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk. 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. We note that Hang Yick Holdings Company Limited (HKG:1894) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. 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. 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.
Check out our latest analysis for Hang Yick Holdings
How Much Debt Does Hang Yick Holdings Carry?
The image below, which you can click on for greater detail, shows that at March 2019 Hang Yick Holdings had debt of HK$29.0m, up from HK$2.37m in one year. However, it does have HK$139.6m in cash offsetting this, leading to net cash of HK$110.6m.
How Strong Is Hang Yick Holdings's Balance Sheet?
The latest balance sheet data shows that Hang Yick Holdings had liabilities of HK$42.3m due within a year, and liabilities of HK$262.0k falling due after that. Offsetting this, it had HK$139.6m in cash and HK$65.0m in receivables that were due within 12 months. So it actually has HK$162.0m more liquid assets than total liabilities.
This surplus suggests that Hang Yick Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Hang Yick Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.
In fact Hang Yick Holdings's saving grace is its low debt levels, because its EBIT has tanked 27% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is Hang Yick Holdings's earnings that will influence how the balance sheet holds up in the future. 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.