We Think Wing Tai Properties (HKG:369) Is Taking Some Risk With Its Debt
In This Article:
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. 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. As with many other companies Wing Tai Properties Limited (HKG:369) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Wing Tai Properties
What Is Wing Tai Properties's Debt?
You can click the graphic below for the historical numbers, but it shows that Wing Tai Properties had HK$4.76b of debt in June 2019, down from HK$5.32b, one year before. However, it does have HK$2.39b in cash offsetting this, leading to net debt of about HK$2.37b.
A Look At Wing Tai Properties's Liabilities
According to the last reported balance sheet, Wing Tai Properties had liabilities of HK$3.08b due within 12 months, and liabilities of HK$4.26b due beyond 12 months. Offsetting this, it had HK$2.39b in cash and HK$529.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$4.42b.
This deficit is considerable relative to its market capitalization of HK$6.56b, so it does suggest shareholders should keep an eye on Wing Tai Properties's use of debt. This suggests shareholders would heavily diluted if the company needed to shore up its balance sheet in a hurry.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.