Is Wing Lee Development Construction Holdings (HKG:9639) A Risky Investment?

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. Importantly, Wing Lee Development Construction Holdings Limited (HKG:9639) does carry debt. But is this debt a concern to shareholders?

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When Is Debt A Problem?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Wing Lee Development Construction Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2025 Wing Lee Development Construction Holdings had HK$62.3m of debt, an increase on HK$50.3m, over one year. But on the other hand it also has HK$99.7m in cash, leading to a HK$37.4m net cash position.

How Strong Is Wing Lee Development Construction Holdings' Balance Sheet?

According to the last reported balance sheet, Wing Lee Development Construction Holdings had liabilities of HK$196.9m due within 12 months, and liabilities of HK$20.7m due beyond 12 months. Offsetting these obligations, it had cash of HK$99.7m as well as receivables valued at HK$293.6m due within 12 months. So it actually has HK$175.6m more liquid assets than total liabilities.

This excess liquidity suggests that Wing Lee Development Construction Holdings is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Wing Lee Development Construction Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Wing Lee Development Construction Holdings

But the bad news is that Wing Lee Development Construction Holdings has seen its EBIT plunge 14% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Wing Lee Development Construction 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Wing Lee Development Construction Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Wing Lee Development Construction Holdings's free cash flow amounted to 29% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Wing Lee Development Construction Holdings has HK$37.4m in net cash and a decent-looking balance sheet. So we don't have any problem with Wing Lee Development Construction Holdings's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Wing Lee Development Construction Holdings that you should be aware of.

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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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.