Is Sam Woo Construction Group (HKG:3822) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Sam Woo Construction Group Limited (HKG:3822) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Sam Woo Construction Group

What Is Sam Woo Construction Group's Debt?

The image below, which you can click on for greater detail, shows that Sam Woo Construction Group had debt of HK$97.9m at the end of March 2022, a reduction from HK$106.5m over a year. However, it does have HK$139.8m in cash offsetting this, leading to net cash of HK$42.0m.

A Look At Sam Woo Construction Group's Liabilities

We can see from the most recent balance sheet that Sam Woo Construction Group had liabilities of HK$214.2m falling due within a year, and liabilities of HK$57.9m due beyond that. On the other hand, it had cash of HK$139.8m and HK$100.0m worth of receivables due within a year. So its liabilities total HK$32.3m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Sam Woo Construction Group is worth HK$131.0m, 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. While it does have liabilities worth noting, Sam Woo Construction Group also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Sam Woo Construction Group'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.

In the last year Sam Woo Construction Group's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

So How Risky Is Sam Woo Construction Group?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Sam Woo Construction Group had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of HK$22m and booked a HK$101m accounting loss. But the saving grace is the HK$42.0m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. To that end, you should learn about the 3 warning signs we've spotted with Sam Woo Construction Group (including 2 which are significant) .

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.

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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.