Is SFK Construction Holdings (HKG:1447) Using Too Much Debt?

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.' 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. We note that SFK Construction Holdings Limited (HKG:1447) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for SFK Construction Holdings

How Much Debt Does SFK Construction Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that SFK Construction Holdings had HK$200.4m of debt in December 2020, down from HK$408.5m, one year before. However, its balance sheet shows it holds HK$449.8m in cash, so it actually has HK$249.4m net cash.

A Look At SFK Construction Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that SFK Construction Holdings had liabilities of HK$1.71b due within 12 months and liabilities of HK$44.2m due beyond that. Offsetting this, it had HK$449.8m in cash and HK$1.52b in receivables that were due within 12 months. So it can boast HK$220.1m more liquid assets than total liabilities.

This luscious liquidity implies that SFK Construction Holdings' balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, SFK Construction Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is SFK Construction Holdings'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.

Over 12 months, SFK Construction Holdings made a loss at the EBIT level, and saw its revenue drop to HK$3.8b, which is a fall of 31%. That makes us nervous, to say the least.

So How Risky Is SFK Construction Holdings?

Although SFK Construction Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of HK$239m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. There's no doubt the next few years will be crucial to how the business matures. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for SFK Construction Holdings (of which 1 is concerning!) you should know about.

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.

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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. 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.
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