Is Superactive Group (HKG:176) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Superactive Group Company Limited (HKG:176) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Superactive Group

What Is Superactive Group's Debt?

As you can see below, Superactive Group had HK$488.0m of debt at June 2023, down from HK$517.3m a year prior. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is Superactive Group's Balance Sheet?

According to the last reported balance sheet, Superactive Group had liabilities of HK$739.3m due within 12 months, and liabilities of HK$85.9m due beyond 12 months. On the other hand, it had cash of HK$7.41m and HK$38.5m worth of receivables due within a year. So its liabilities total HK$779.3m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$46.7m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Superactive Group would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Superactive Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Superactive Group had a loss before interest and tax, and actually shrunk its revenue by 44%, to HK$72m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Superactive Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable HK$8.3m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost HK$89m in the last year. So we're not very excited about owning this stock. Its too risky for us. 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. Be aware that Superactive Group is showing 3 warning signs in our investment analysis , you should know about...

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. 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.