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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Hang Lung Group Limited (HKG:10) does carry debt. But the real question is whether this debt is making the company risky.
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Hang Lung Group
What Is Hang Lung Group's Net Debt?
As you can see below, at the end of June 2022, Hang Lung Group had HK$44.9b of debt, up from HK$41.3b a year ago. Click the image for more detail. However, it also had HK$5.31b in cash, and so its net debt is HK$39.6b.
SEHK:10 Debt to Equity History October 5th 2022
A Look At Hang Lung Group's Liabilities
The latest balance sheet data shows that Hang Lung Group had liabilities of HK$13.6b due within a year, and liabilities of HK$57.1b falling due after that. On the other hand, it had cash of HK$5.31b and HK$3.53b worth of receivables due within a year. So it has liabilities totalling HK$61.8b more than its cash and near-term receivables, combined.
This deficit casts a shadow over the HK$17.8b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Hang Lung Group would likely require a major re-capitalisation if it had to pay its creditors today.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
As it happens Hang Lung Group has a fairly concerning net debt to EBITDA ratio of 5.3 but very strong interest coverage of 19.4. So either it has access to very cheap long term debt or that interest expense is going to grow! Hang Lung Group grew its EBIT by 7.8% in the last year. Whilst that hardly knocks our socks off it is a positive when it comes to debt. 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 Hang Lung Group 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the most recent three years, Hang Lung Group recorded free cash flow worth 60% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Our View
To be frank both Hang Lung Group's net debt to EBITDA and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But on the bright side, its interest cover is a good sign, and makes us more optimistic. Looking at the balance sheet and taking into account all these factors, we do believe that debt is making Hang Lung Group stock a bit risky. That's not necessarily a bad thing, but we'd generally feel more comfortable with less leverage. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Hang Lung Group (including 1 which is a bit unpleasant) .
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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.
傳奇基金經理李露(Charlie Munger 支持他)曾經說過:“最大的投資風險不是價格的波動,而是你是否會遭受永久的資本損失。”當我們想到一家公司的風險有多大時,我們總是喜歡看看它對債務的使用,因爲債務超負荷會導致破產。重要的是, 恆隆集團有限公司 (HKG: 10)確實有債務。但真正的問題是這筆債務是否使公司面臨風險。
債務何時危險?
債務爲企業提供幫助,直到企業難以用新的資本或自由現金流還清債務。最終,如果公司無法履行償還債務的法律義務,股東可能一無所有地離開。但是,更常見(但仍然令人痛苦)的情況是,它必須以低廉的價格籌集新的股權資本,從而永久稀釋股東。當然,許多公司使用債務爲增長提供資金,而不會產生任何負面後果。考慮公司債務水平的第一步是將其現金和債務放在一起考慮。
查看我們對恆隆集團的最新分析
恆隆集團的淨負債是多少?
如下所示,截至2022年6月底,恆隆集團的債務爲449億港元,高於一年前的413億港元。點擊圖片瞭解更多細節。但是,它也有53.1億港元的現金,因此其淨負債爲396億港元。
香港交易所:10 債務轉股權歷史記錄 2022 年 10 月 5 日
看看恆隆集團的負債
最新的資產負債表數據顯示,恆隆集團在一年內到期的負債爲136億港元,此後到期的負債爲571億港元。另一方面,它在一年內有53.1億港元的現金和35.3億港元的應收賬款到期。因此,它的負債總額比其現金和短期應收賬款的總和多出618億港元。
這種赤字給這家178億港元的公司蒙上了陰影,就像一個超越凡人的巨人。因此,毫無疑問,我們會密切關注其資產負債表。畢竟,如果恆隆集團今天必須向債權人付款,則可能需要進行大規模的資本重組。
爲了擴大公司相對於收益的負債規模,我們計算其淨負債除以利息、稅項、折舊和攤銷前的收益(EBITDA),將其利息和稅前收益(EBIT)除以利息支出(利息保障)。這樣,我們既考慮債務的絕對數量,也考慮爲債務支付的利率。
碰巧的是,恆隆集團的淨負債與息稅折舊攤銷前利潤的比率相當令人擔憂,爲5.3,但利息覆蓋率非常高,爲19.4。因此,要麼它有機會獲得非常便宜的長期債務,要麼利息支出將增加!去年,恆隆集團的息稅前利潤增長了7.8%。儘管這幾乎不會讓我們大喫一驚,但在債務方面卻是積極的。資產負債表顯然是分析債務時需要重點關注的領域。但是你不能完全孤立地看待債務;因爲恆隆集團需要收入來償還債務。因此,如果你想進一步瞭解它的收益,可能值得看看這張長期收益趨勢圖。
最後,公司只能用冷硬現金償還債務,不能用會計利潤。因此,我們顯然需要研究息稅前利潤是否帶來了相應的自由現金流。在最近三年中,恆隆集團錄得的自由現金流相當於其息稅前利潤的60%,這與正常水平差不多,因爲自由現金流不包括利息和稅收。這種自由現金流使公司處於在適當時償還債務的有利地位。
我們的觀點
坦率地說,恆隆集團的淨負債佔息稅折舊攤銷前利潤的比例及其保持在總負債之上的往績都使我們對其債務水平感到相當不舒服。但好的一面是,它的利息覆蓋是個好兆頭,也使我們更加樂觀。從資產負債表來看,考慮到所有這些因素,我們確實認爲債務使恆隆集團的股票有點風險。這不一定是壞事,但我們通常會覺得槓桿率降低會更舒服。毫無疑問,我們從資產負債表中學到的關於債務的知識最多。但是,並非所有的投資風險都存在於資產負債表內——遠非如此。爲此,你應該瞭解 2 個警告標誌 我們發現了恆隆集團(包括1個,有點不愉快)。
如果你有興趣投資那些可以在沒有債務負擔的情況下增加利潤的企業,那就看看這個 免費的 資產負債表上有淨現金的成長型企業名單。
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Simply Wall St 的這篇文章本質上是一般性的。 我們僅使用公正的方法提供基於歷史數據和分析師預測的評論,我們的文章無意提供財務建議。 它不構成買入或賣出任何股票的建議,也沒有考慮您的目標或財務狀況。我們的目標是爲您提供由基本面數據驅動的長期重點分析。請注意,我們的分析可能未將最新的價格敏感型公司公告或定性材料考慮在內。簡而言之,華爾街對上述任何股票都沒有頭寸。