Does Lai Si Enterprise Holding (HKG:2266) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We can see that Lai Si Enterprise Holding Limited (HKG:2266) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Lai Si Enterprise Holding

What Is Lai Si Enterprise Holding's Net Debt?

As you can see below, Lai Si Enterprise Holding had MO$52.8m of debt at June 2020, down from MO$56.7m a year prior. However, it also had MO$44.3m in cash, and so its net debt is MO$8.47m.

How Strong Is Lai Si Enterprise Holding's Balance Sheet?

According to the last reported balance sheet, Lai Si Enterprise Holding had liabilities of MO$104.0m due within 12 months, and liabilities of MO$12.1m due beyond 12 months. Offsetting this, it had MO$44.3m in cash and MO$130.7m in receivables that were due within 12 months. So it can boast MO$58.9m more liquid assets than total liabilities.

This surplus suggests that Lai Si Enterprise Holding is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. There's no doubt that we learn most about debt from the balance sheet. But it is Lai Si Enterprise Holding'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.

In the last year Lai Si Enterprise Holding wasn't profitable at an EBIT level, but managed to grow its revenue by 19%, to MO$242m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Lai Si Enterprise Holding produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at MO$1.2m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd be more likely to spend time trying to understand the stock if the company made a profit. This one is a bit too risky for our liking. 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. Case in point: We've spotted 2 warning signs for Lai Si Enterprise Holding you should be aware of, and 1 of them is a bit unpleasant.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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