Lai Si Enterprise Holding (HKG:2266) Is Making Moderate Use Of 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 can see that Lai Si Enterprise Holding Limited (HKG:2266) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Lai Si Enterprise Holding

How Much Debt Does Lai Si Enterprise Holding Carry?

As you can see below, Lai Si Enterprise Holding had MO$50.2m of debt at June 2021, down from MO$52.8m a year prior. However, because it has a cash reserve of MO$11.2m, its net debt is less, at about MO$39.1m.

A Look At Lai Si Enterprise Holding's Liabilities

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. Offsetting this, it had MO$11.2m in cash and MO$60.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by MO$17.6m.

Of course, Lai Si Enterprise Holding has a market capitalization of MO$185.4m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 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, Lai Si Enterprise Holding made a loss at the EBIT level, and saw its revenue drop to MO$153m, which is a fall of 37%. To be frank that doesn't bode well.

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 MO$17m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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$16m of cash over the last year. So in short it's a really risky stock. 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. For example, we've discovered 3 warning signs for Lai Si Enterprise Holding (2 shouldn't be ignored!) 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.
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