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Is Sino Energy International Holdings Group (HKG:1096) Using Too Much Debt?

Simply Wall St

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Sino Energy International Holdings Group Limited (HKG:1096) makes use of 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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Sino Energy International Holdings Group

What Is Sino Energy International Holdings Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2018 Sino Energy International Holdings Group had CN¥1.52b of debt, an increase on CN¥1.38b, over one year. However, because it has a cash reserve of CN¥596.2m, its net debt is less, at about CN¥922.4m.

SEHK:1096 Historical Debt, July 30th 2019

How Healthy Is Sino Energy International Holdings Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sino Energy International Holdings Group had liabilities of CN¥677.1m due within 12 months and liabilities of CN¥963.0m due beyond that. Offsetting these obligations, it had cash of CN¥596.2m as well as receivables valued at CN¥152.4m due within 12 months. So it has liabilities totalling CN¥891.5m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥185.2m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Sino Energy International Holdings Group would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is Sino Energy International Holdings Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Sino Energy International Holdings Group saw its revenue drop to CN¥103m, which is a fall of 46%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Sino Energy International Holdings Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CN¥134m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost CN¥260m in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky, like eating chicken you think might look too pink. We'd prefer pass. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Sino Energy International Holdings Group insider transactions.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.