Is Hing Ming Holdings (HKG:8425) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that Hing Ming Holdings Limited (HKG:8425) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Hing Ming Holdings

How Much Debt Does Hing Ming Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Hing Ming Holdings had HK$24.9m of debt, an increase on HK$19.5m, over one year. However, it does have HK$13.2m in cash offsetting this, leading to net debt of about HK$11.7m.

How Healthy Is Hing Ming Holdings' Balance Sheet?

According to the last reported balance sheet, Hing Ming Holdings had liabilities of HK$36.6m due within 12 months, and liabilities of HK$41.2m due beyond 12 months. Offsetting these obligations, it had cash of HK$13.2m as well as receivables valued at HK$12.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$52.1m.

The deficiency here weighs heavily on the HK$19.6m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Hing Ming Holdings would probably need a major re-capitalization if its creditors were to demand repayment. 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 Hing Ming 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.

Over 12 months, Hing Ming Holdings made a loss at the EBIT level, and saw its revenue drop to HK$95m, which is a fall of 7.5%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Hing Ming Holdings produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable HK$11m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of HK$13m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Hing Ming Holdings .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.