Does Smart City Development Holdings (HKG:8268) Have A Healthy Balance Sheet?

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. As with many other companies Smart City Development Holdings Limited (HKG:8268) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Smart City Development Holdings

What Is Smart City Development Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Smart City Development Holdings had HK$18.5m of debt, an increase on HK$7.13m, over one year. But on the other hand it also has HK$175.7m in cash, leading to a HK$157.2m net cash position.

A Look At Smart City Development Holdings' Liabilities

We can see from the most recent balance sheet that Smart City Development Holdings had liabilities of HK$322.7m falling due within a year, and liabilities of HK$1.03m due beyond that. Offsetting these obligations, it had cash of HK$175.7m as well as receivables valued at HK$156.3m due within 12 months. So it can boast HK$8.32m more liquid assets than total liabilities.

It's good to see that Smart City Development Holdings has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Smart City Development Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Smart City Development Holdings'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, Smart City Development Holdings made a loss at the EBIT level, and saw its revenue drop to HK$430m, which is a fall of 34%. That makes us nervous, to say the least.

So How Risky Is Smart City Development Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Smart City Development Holdings had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of HK$3.2m and booked a HK$5.2m accounting loss. With only HK$157.2m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 Smart City Development Holdings has 3 warning signs (and 2 which don't sit too well with us) we think you should know about.

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. 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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