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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Wai Chun Mining Industry Group Company Limited (HKG:660) does carry debt. But the real question is whether this debt is making the company risky.
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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Wai Chun Mining Industry Group
What Is Wai Chun Mining Industry Group's Debt?
The chart below, which you can click on for greater detail, shows that Wai Chun Mining Industry Group had HK$96.2m in debt in December 2018; about the same as the year before. However, it does have HK$4.54m in cash offsetting this, leading to net debt of about HK$91.6m.
How Strong Is Wai Chun Mining Industry Group's Balance Sheet?
The latest balance sheet data shows that Wai Chun Mining Industry Group had liabilities of HK$158.4m due within a year, and liabilities of HK$33.6m falling due after that. Offsetting these obligations, it had cash of HK$4.54m as well as receivables valued at HK$29.9m due within 12 months. So its liabilities total HK$157.6m more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Wai Chun Mining Industry Group is worth HK$746.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Wai Chun Mining Industry Group'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 Wai Chun Mining Industry Group actually shrunk its revenue by 6.1%, to HK$481m. We would much prefer see growth.