Would Sheung Moon Holdings (HKG:8523) Be Better Off With Less Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Sheung Moon Holdings Limited (HKG:8523) does carry debt. 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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Sheung Moon Holdings

How Much Debt Does Sheung Moon Holdings Carry?

The chart below, which you can click on for greater detail, shows that Sheung Moon Holdings had HK$120.2m in debt in March 2021; about the same as the year before. However, because it has a cash reserve of HK$23.7m, its net debt is less, at about HK$96.5m.

A Look At Sheung Moon Holdings' Liabilities

According to the last reported balance sheet, Sheung Moon Holdings had liabilities of HK$183.9m due within 12 months, and liabilities of HK$14.3m due beyond 12 months. Offsetting these obligations, it had cash of HK$23.7m as well as receivables valued at HK$221.8m due within 12 months. So it can boast HK$47.2m more liquid assets than total liabilities.

This surplus liquidity suggests that Sheung Moon Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sheung Moon Holdings will need earnings to service that debt. 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 Sheung Moon Holdings had a loss before interest and tax, and actually shrunk its revenue by 29%, to HK$412m. To be frank that doesn't bode well.

Caveat Emptor

While Sheung Moon Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at HK$3.8m. 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. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. This one is a bit too risky for our liking. 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 Sheung Moon Holdings has 5 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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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