Is Lai Si Enterprise Holding (HKG:2266) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. 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?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Lai Si Enterprise Holding

What Is Lai Si Enterprise Holding's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Lai Si Enterprise Holding had MO$50.2m of debt in June 2021, down from MO$52.8m, one year before. However, because it has a cash reserve of MO$11.2m, its net debt is less, at about MO$39.1m.

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

The latest balance sheet data shows that Lai Si Enterprise Holding had liabilities of MO$85.6m due within a year, and liabilities of MO$3.59m falling due after that. On the other hand, it had cash of MO$11.2m and MO$60.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by MO$17.6m.

Given Lai Si Enterprise Holding has a market capitalization of MO$129.8m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. 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 36%, to MO$153m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Lai Si Enterprise Holding'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 MO$17m at the EBIT level. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through MO$14m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Lai Si Enterprise Holding (1 is concerning!) that you should be aware of before investing here.

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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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.