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.
傳奇的基金經理李露(Charlie Munger 支持)曾經說過:「最大的投資風險不是價格的波動性,而是您是否會遭受永久資本損失。」因此,當您考慮任何給定股票的風險時,很明顯,您需要考慮債務,因為過多的債務可能會使公司下沉。與許多其他公司一樣 康福有限公司 (新加坡交易所:H30) 利用債務。但股東是否應該擔心其使用債務呢?
當債務是一個問題嗎?
債務協助企業,直到企業有麻煩還清它, 無論是新資本或自由現金流.在最壞的情況下,如果公司不能向債權人付款,可能會破產。但是,更常見(但仍然痛苦)的情況是,它必須以低價籌集新的股本,從而永久稀釋股東。當然,債務的好處在於,它往往代表著廉價的資本,特別是當它以高回報率進行再投資的公司中取代稀釋時。當我們檢查債務水平時,我們首先考慮現金和債務水平,一起。
查看我們對洪福的最新分析
康福攜帶多少債務?
您可以單擊以下圖表了解更多詳細信息,顯示康福在 2022 年 6 月的債務達 759.2 億新元,與前一年大致相同。然而,由於它的現金儲備為 63.200 萬新加坡元,其淨債務較低,約為 696.0 億新加坡元。
新加坡:上半年債務對股本歷史 (2022 年 9 月 29 日)
康福資產負債表健康有多健康?
最新的資產負債表數據顯示,洪福在一年內到期負債為 1.9 億新加坡元,其後到期負債則下降 6540 億新加坡元。抵銷這些義務,它擁有 63.200 萬新加坡元的現金以及價值 4.84 億新加坡元的應收帳款在 12 個月內到期。因此,其負債總額為 778.7 億新元,超過現金和短期應收帳款的總額。
這是一座相對於其市值 806.0 億新加坡元的槓桿作用。如果其貸款人要求支付資產負債表,股東可能會面臨嚴重的稀釋。
我們使用兩個主要比率來告知我們相對於收益的債務水平。第一種是淨債務除以前利息、稅項、折舊和攤銷 (EBITDA) 之前的收益,而第二個則是利息與稅前盈利 (EBIT) 涵蓋其利息支出 (或其利息涵蓋範圍,簡稱為簡稱) 的次數。這種方法的優點是,我們同時考慮到債務的絕對量子(與淨債務 EBITDA)和與該債務相關的實際利息支出(及其利息覆蓋比率)。
2.3 倍疲軟的利息覆蓋和令人不安的高淨債務與 EBITDA 比率 15.5 打擊了我們對洪福的信心,就像對腸道一樣。這意味著我們會認為它負擔沉重的債務負荷。更輕盈的是,我們注意到洪福在去年的 EBIT 增長了 23%。如果它能保持這種改善,它的債務負荷將開始像變暖的世界中的冰川一樣融化。在分析債務水平時,資產負債表是顯而易見的起點。但是,正是洪福的收益將影響資產負債表未來的持有方式。因此,如果您熱衷於發現更多有關其收益的信息,則可能值得查看此圖表的長期盈利趨勢。
最後,一家公司只能用冷硬現金償還債務,而不是會計利潤。因此,我們總是檢查有多少 EBIT 被轉換為自由現金流。對於任何股東來說,洪福實際上在過去三年產生的自由現金流量比 EBIT 更多。這種強勁的現金產生像穿著大黃蜂西裝的小狗一樣溫暖我們的心。
我們的觀點
我們對洪福的難度淨債務息稅折舊攤銷前盈利感到不安,但我們也有積極的重點。例如,將 EBIT 轉換為自由現金流和 EBIT 增長率使我們對其債務管理能力有一定的信心。在考慮上述數據點之後,我們認為洪福的債務確實使其有點冒險。這不一定是一件壞事,因為槓桿可以提高股票回報,但這是需要注意的事情。當您分析債務時,資產負債表顯然是要關注的領域。但最終,每家公司都可能包含資產負債表之外存在的風險。 我們已經確定了 2 個警告標誌 與洪福(至少 1 個這使我們有點不舒服),理解它們應該是您投資過程的一部分。
在一天結束時,最好將重點放在沒有淨債務的公司上。您可以訪問我們這些公司的特殊列表(所有公司都具有利潤增長記錄)。它是免費的。
對這篇文章有反饋嗎?關注內容? 取得聯繫 直接與我們聯繫。 或者,通過電子郵件發送電子郵件給編輯團隊。
這篇文章由簡單牆聖是一般性質. 我們僅使用公正的方法,根據歷史數據和分析師預測提供評論,我們的文章並不打算作為財務建議。 它並不構成購買或出售任何股票的建議,也不會考慮您的目標或您的財務狀況。我們的目標是為您帶來由基本數據驅動的長期集中分析。請注意,我們的分析可能不會考慮最新的價格敏感公司公告或定性材料。簡易華街在提及的任何股票中都沒有倉位。