Health Check: How Prudently Does Lai Sun Garment (International) (HKG:191) Use Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Lai Sun Garment (International) Limited (HKG:191) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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.

What Is Lai Sun Garment (International)'s Net Debt?

The chart below, which you can click on for greater detail, shows that Lai Sun Garment (International) had HK$26.4b in debt in July 2025; about the same as the year before. On the flip side, it has HK$3.20b in cash leading to net debt of about HK$23.2b.

How Healthy Is Lai Sun Garment (International)'s Balance Sheet?

According to the last reported balance sheet, Lai Sun Garment (International) had liabilities of HK$19.4b due within 12 months, and liabilities of HK$16.5b due beyond 12 months. Offsetting these obligations, it had cash of HK$3.20b as well as receivables valued at HK$371.9m due within 12 months. So it has liabilities totalling HK$32.3b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the HK$494.7m 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'd watch its balance sheet closely, without a doubt. After all, Lai Sun Garment (International) would likely require a major re-capitalisation if it had to pay its creditors today. 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 Lai Sun Garment (International) 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.

Check out our latest analysis for Lai Sun Garment (International)

Given it has no significant operating revenue at the moment, shareholders will be hoping Lai Sun Garment (International) can make progress and gain better traction for the business, before it runs low on cash.

Caveat Emptor

Not only did Lai Sun Garment (International)'s revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping HK$1.8b. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost HK$1.7b in the last year. So we think buying this stock is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Lai Sun Garment (International) (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.