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 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. As with many other companies Hong Fok Corporation Limited (SGX:H30) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. 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.
View our latest analysis for Hong Fok
How Much Debt Does Hong Fok Carry?
The chart below, which you can click on for greater detail, shows that Hong Fok had S$759.2m in debt in June 2022; about the same as the year before. However, because it has a cash reserve of S$63.2m, its net debt is less, at about S$696.0m.
SGX:H30 Debt to Equity History September 29th 2022
How Healthy Is Hong Fok's Balance Sheet?
The latest balance sheet data shows that Hong Fok had liabilities of S$192.7m due within a year, and liabilities of S$654.0m falling due after that. Offsetting these obligations, it had cash of S$63.2m as well as receivables valued at S$4.84m due within 12 months. So its liabilities total S$778.7m more than the combination of its cash and short-term receivables.
This is a mountain of leverage relative to its market capitalization of S$806.0m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).
Weak interest cover of 2.3 times and a disturbingly high net debt to EBITDA ratio of 15.5 hit our confidence in Hong Fok like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. On a lighter note, we note that Hong Fok grew its EBIT by 23% in the last year. If it can maintain that kind of improvement, its debt load will begin to melt away like glaciers in a warming world. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hong Fok's earnings that will influence how the balance sheet holds up in the future. 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. Happily for any shareholders, Hong Fok actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Our View
We feel some trepidation about Hong Fok's difficulty net debt to EBITDA, but we've got positives to focus on, too. For example, its conversion of EBIT to free cash flow and EBIT growth rate give us some confidence in its ability to manage its debt. We think that Hong Fok's debt does make it a bit risky, after considering the aforementioned data points together. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. 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. We've identified 2 warning signs with Hong Fok (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
传奇基金经理李露(Charlie Munger 支持他)曾经说过:“最大的投资风险不是价格的波动,而是你是否会遭受永久的资本损失。”因此,很明显,当你考虑任何给定股票的风险时,你需要考虑债务,因为过多的债务会使公司陷入困境。和许多其他公司一样 康福集团有限公司 (SGX: H30) 使用债务。但是,股东是否应该担心它使用债务?
债务何时会成为问题?
债务为企业提供帮助,直到企业难以用新资本或自由现金流还清债务。在最坏的情况下,如果公司无法向债权人付款,它可能会破产。但是,更常见(但仍然令人痛苦)的情况是它必须以低价筹集新的股权资本,从而永久稀释股东。当然,债务的好处是它通常代表廉价资本,尤其是当它取代了具有高回报率再投资能力的公司的稀释时。当我们研究债务水平时,我们首先将现金和债务水平放在一起考虑。
查看我们对Hong Fok的最新分析
Hong fok背负了多少债务?
你可以点击下面的图表了解更多细节,该图表显示Hong Fok在2022年6月有7.592亿新元的债务;与前一年大致相同。但是,由于其现金储备为6,320万新元,因此其净负债较少,约为6.960亿新元。
新加坡证券交易所:H30 债转股历史记录 2022 年 9 月 29 日
Hong Fok的资产负债表有多健康?
最新的资产负债表数据显示,Hong Fok在一年内到期的负债为1.927亿新元,之后到期的负债为6.54亿新元。抵消这些债务的是,它的现金为6,320万新元,还有价值484万新元的应收账款将在12个月内到期。因此,其负债总额比其现金和短期应收账款的总和多出7.787亿新元。
相对于其8.060亿新元的市值,这是一座巨大的杠杆作用。如果其贷款机构要求其支撑资产负债表,股东可能会面临严重稀释。
我们使用两个主要比率来告知我们相对于收益的债务水平。第一个是净负债除以利息、税项、折旧和摊销前的收益(EBITDA),第二个是其利息和税前收益(EBIT)覆盖其利息支出(或简称利息保障)的多少倍。这种方法的优势在于,我们既考虑了债务的绝对数量(包括净负债与息税折旧摊销前利润),也考虑了与该债务相关的实际利息支出(及其利息覆盖率)。
2.3倍的疲软利息覆盖率和15.5的令人不安的高净负债与息税折旧摊销前利润的比率打击了我们对Hong Fok的信心,就像一拳打中了直觉。这意味着我们会认为它背负着沉重的债务负担。简而言之,我们注意到香港去年息税前利润增长了23%。如果它能够保持这种改善,其债务负担将开始像变暖世界中的冰川一样消失。在分析债务水平时,资产负债表是显而易见的起点。但是,Hong Fok的收益将影响未来资产负债表的走势。因此,如果你想更多地了解其收益,可能值得看看这张长期收益趋势图。
最后,公司只能用冷硬现金偿还债务,不能用会计利润。因此,我们总是检查息税前利润中有多少转化为自由现金流。令所有股东感到高兴的是,在过去三年中,Hong Fok产生的自由现金流实际上超过了息税前利润。这种强劲的现金产生就像穿着大黄蜂套装的小狗一样温暖我们的心。
我们的观点
我们对Hong Fok难以将净负债与息税折旧摊销前利润相比感到有些担忧,但我们也有积极的方面需要关注。例如,它将息税前利润转换为自由现金流和息税前利润增长率使我们对其管理债务的能力充满信心。综合考虑了上述数据点,我们认为Hong Fok的债务确实使其有点风险。这不一定是一件坏事,因为杠杆可以提高股本回报率,但这是需要注意的事情。资产负债表显然是你分析债务时需要关注的领域。但归根结底,每家公司都可以控制资产负债表之外存在的风险。 我们已经确定了 2 个警告信号 与Hong Fok合作(至少 1,这让我们有点不舒服),理解它们应该是你投资过程的一部分。
归根结底,通常最好将注意力集中在没有净负债的公司身上。您可以访问我们的此类公司的特别名单(所有公司都有利润增长记录)。它是免费的。
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Simply Wall St 的这篇文章本质上是一般性的。 我们仅使用不偏不倚的方法根据历史数据和分析师预测提供评论,我们的文章并非旨在提供财务建议。 它不构成买入或卖出任何股票的建议,也没有考虑您的目标或财务状况。我们的目标是为您提供由基本面数据驱动的长期重点分析。请注意,我们的分析可能未将最新的价格敏感型公司公告或定性材料考虑在内。简而言之,华尔街对上述任何股票都没有头寸。