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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Hang Yick Holdings Company Limited (HKG:1894) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Hang Yick Holdings
How Much Debt Does Hang Yick Holdings Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2019 Hang Yick Holdings had HK$50.0m of debt, an increase on none, over one year. However, its balance sheet shows it holds HK$73.1m in cash, so it actually has HK$23.1m net cash.
A Look At Hang Yick Holdings's Liabilities
We can see from the most recent balance sheet that Hang Yick Holdings had liabilities of HK$67.8m falling due within a year, and liabilities of HK$1.24m due beyond that. Offsetting these obligations, it had cash of HK$73.1m as well as receivables valued at HK$147.4m due within 12 months. So it can boast HK$151.6m 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.
It is just as well that Hang Yick Holdings's load is not too heavy, because its EBIT was down 60% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Hang Yick Holdings 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.