We think Hwa Hong (SGX: H19) has a good deal of debt

Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried “. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We note that Hwa Hong Corporation Limited (SGX: H19) has debt on its balance sheet. But should shareholders be concerned about its use of debt?

Why Does Debt Bring Risk?

Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth without negative consequences. When we look at debt levels, we first look at cash and debt levels together.

See our latest analysis for Hwa Hong

How much debt does Hwa Hong have?

As you can see below, at the end of June 2021, Hwa Hong had S $ 89.7 million in debt, up from S $ 84.8 million a year ago. Click on the image for more details. However, it has S $ 62.7 million offsetting this, which leads to a net debt of around S $ 27.0 million.

SGX: H19 History of debt to equity September 24, 2021

A look at Hwa Hong’s responsibilities

Zooming in on the latest balance sheet data, we can see that Hwa Hong had a liability of S $ 90.2 million due within 12 months and a liability of S $ 15.4 million beyond. On the other hand, he had S $ 62.7 million in cash and S $ 9.14 million in receivables due within one year. It therefore has liabilities totaling S $ 33.7 million more than its cash and short-term receivables combined.

Of course, Hwa Hong has a market cap of S $ 218.6 million, so this liability is likely manageable. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in isolation; since Hwa Hong will need income to repay this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.

Over the past year, Hwa Hong has incurred a loss before interest and taxes and has actually reduced her income by 28%, to S $ 11 million. To be frank, that doesn’t bode well.

Emptor Warning

Not only has Hwa Hong’s revenue declined over the past twelve months, it has also produced negative earnings before interest and taxes (EBIT). To be precise, the EBIT loss amounted to S $ 2.6 million. When we look at this and recall the liabilities on its balance sheet, versus the cash flow, it seems unwise to us that the company has debt. We therefore believe that its record is a bit strained, but not irreparable. On the positive side, we note that EBIT for the past twelve months is worse than free cash flow of S $ 3.2 million and profit of S $ 6.1 million. So if we focus on these metrics, there seems to be a chance that the company will manage its debt without too much trouble. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. To this end, you should inquire about the 4 warning signs we spotted with Hwa Hong (including 2 which are significant).

If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.

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