Is Lai Si Enterprise Holding (HKG:2266) 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.' 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 the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Lai Si Enterprise Holding

What Is Lai Si Enterprise Holding's Debt?

You can click the graphic below for the historical numbers, but it shows that Lai Si Enterprise Holding had MO$42.5m of debt in December 2020, down from MO$54.8m, one year before. On the flip side, it has MO$22.0m in cash leading to net debt of about MO$20.5m.

A Look At Lai Si Enterprise Holding's Liabilities

The latest balance sheet data shows that Lai Si Enterprise Holding had liabilities of MO$92.3m due within a year, and liabilities of MO$3.78m falling due after that. Offsetting this, it had MO$22.0m in cash and MO$77.5m in receivables that were due within 12 months. So it actually has MO$3.44m more liquid assets than total liabilities.

This state of affairs indicates that Lai Si Enterprise Holding's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the MO$222.5m company is struggling for cash, we still think it's worth monitoring its balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Lai Si Enterprise Holding will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Lai Si Enterprise Holding made a loss at the EBIT level, and saw its revenue drop to MO$161m, which is a fall of 39%. 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). To be specific the EBIT loss came in at MO$18m. 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 a profit would do more to inspire us to research the business more closely. So it seems too risky for our taste. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Lai Si Enterprise Holding you should be aware of, and 1 of them is potentially serious.

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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