David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Sheung Yue Group Holdings Limited (HKG:1633) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
How Much Debt Does Sheung Yue Group Holdings Carry?
The image below, which you can click on for greater detail, shows that at March 2019 Sheung Yue Group Holdings had debt of HK$4.37m, up from HK$2.32m in one year. However, its balance sheet shows it holds HK$41.0m in cash, so it actually has HK$36.6m net cash.
How Strong Is Sheung Yue Group Holdings's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Sheung Yue Group Holdings had liabilities of HK$59.0m due within 12 months and no liabilities due beyond that. Offsetting this, it had HK$41.0m in cash and HK$105.1m in receivables that were due within 12 months. So it can boast HK$87.1m more liquid assets than total liabilities.
This luscious liquidity implies that Sheung Yue Group Holdings's balance sheet is sturdy like a giant sequoia tree. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Succinctly put, Sheung Yue Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Sheung Yue Group Holdings 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.
In the last year Sheung Yue Group Holdings managed to grow its revenue by 9.7%, to HK$242m. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Sheung Yue Group Holdings?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Sheung Yue Group Holdings had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through HK$16m of cash and made a loss of HK$45m. But at least it has HK$41m on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. For riskier companies like Sheung Yue Group Holdings I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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.
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