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 note that Lai Si Enterprise Holding Limited (HKG:2266) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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?

The image below, which you can click on for greater detail, shows that Lai Si Enterprise Holding had debt of MO$47.8m at the end of December 2021, a reduction from MO$52.6m over a year. However, it does have MO$11.5m in cash offsetting this, leading to net debt of about MO$36.3m.

A Look At Lai Si Enterprise Holding's Liabilities

According to the last reported balance sheet, Lai Si Enterprise Holding had liabilities of MO$95.1m due within 12 months, and liabilities of MO$3.32m due beyond 12 months. On the other hand, it had cash of MO$11.5m and MO$54.5m worth of receivables due within a year. So it has liabilities totalling MO$32.4m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Lai Si Enterprise Holding is worth MO$146.3m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. 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 had a loss before interest and tax, and actually shrunk its revenue by 10%, to MO$144m. We would much prefer see growth.

Caveat Emptor

While Lai Si Enterprise Holding's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping MO$21m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of MO$20m into a profit. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Lai Si Enterprise Holding (1 is a bit unpleasant!) that you should be aware of before investing here.

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.

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.