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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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Hong Lai Huat Group Limited (SGX:CTO) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company 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.
See our latest analysis for Hong Lai Huat Group
What Is Hong Lai Huat Group's Debt?
The image below, which you can click on for greater detail, shows that Hong Lai Huat Group had debt of S$1.59m at the end of June 2019, a reduction from S$7.97m over a year. However, its balance sheet shows it holds S$19.3m in cash, so it actually has S$17.7m net cash.
How Healthy Is Hong Lai Huat Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Hong Lai Huat Group had liabilities of S$8.14m due within 12 months and liabilities of S$12.9m due beyond that. Offsetting these obligations, it had cash of S$19.3m as well as receivables valued at S$8.73m due within 12 months. So it actually has S$6.95m more liquid assets than total liabilities.
This excess liquidity suggests that Hong Lai Huat Group is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Hong Lai Huat Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Hong Lai Huat Group 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.