Is Superactive Group (HKG:176) Weighed On By Its Debt Load?

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. As with many other companies Superactive Group Company Limited (HKG:176) makes use of 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 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Superactive Group

What Is Superactive Group's Debt?

The chart below, which you can click on for greater detail, shows that Superactive Group had HK$499.0m in debt in December 2020; about the same as the year before. On the flip side, it has HK$11.6m in cash leading to net debt of about HK$487.4m.

How Strong Is Superactive Group's Balance Sheet?

We can see from the most recent balance sheet that Superactive Group had liabilities of HK$500.3m falling due within a year, and liabilities of HK$302.1m due beyond that. Offsetting this, it had HK$11.6m in cash and HK$250.9m in receivables that were due within 12 months. So it has liabilities totalling HK$539.8m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of HK$451.2m, we think shareholders really should watch Superactive Group's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Superactive 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.

Over 12 months, Superactive Group made a loss at the EBIT level, and saw its revenue drop to HK$101m, which is a fall of 45%. To be frank that doesn't bode well.

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). To be specific the EBIT loss came in at HK$12m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of HK$108m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. 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 , and 1 of those doesn't sit too well with us...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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