Yahoo Finance Wing Chi Holdings (HKG:6080) Has Debt But No Earnings; Should You Worry?
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. 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. As with many other companies Wing Chi Holdings Limited (HKG:6080) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Wing Chi Holdings
What Is Wing Chi Holdings's Debt?
The image below, which you can click on for greater detail, shows that Wing Chi Holdings had debt of HK$2.03m at the end of March 2019, a reduction from HK$6.78m over a year. However, it does have HK$51.3m in cash offsetting this, leading to net cash of HK$49.3m.
A Look At Wing Chi Holdings's Liabilities
According to the last reported balance sheet, Wing Chi Holdings had liabilities of HK$47.0m due within 12 months, and liabilities of HK$4.09m due beyond 12 months. Offsetting these obligations, it had cash of HK$51.3m as well as receivables valued at HK$125.8m due within 12 months. So it can boast HK$126.0m more liquid assets than total liabilities.
It's good to see that Wing Chi Holdings has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Wing Chi Holdings 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 Wing Chi Holdings will need earnings to service that debt. 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.
Over 12 months, Wing Chi Holdings made a loss at the EBIT level, and saw its revenue drop to HK$393m, which is a fall of 27%. That makes us nervous, to say the least.
So How Risky Is Wing Chi Holdings?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Wing Chi Holdings had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through HK$37m of cash and made a loss of HK$35m. With only HK$49.3m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. For riskier companies like Wing Chi Holdings I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
