Is Stella International Holdings (HKG:1836) Using Debt In A Risky Way?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Stella International Holdings Limited (HKG:1836) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Stella International Holdings

How Much Debt Does Stella International Holdings Carry?

The chart below, which you can click on for greater detail, shows that Stella International Holdings had US$2.89m in debt in December 2020; about the same as the year before. However, its balance sheet shows it holds US$108.8m in cash, so it actually has US$105.9m net cash.

How Healthy Is Stella International Holdings' Balance Sheet?

We can see from the most recent balance sheet that Stella International Holdings had liabilities of US$210.5m falling due within a year, and liabilities of US$15.2m due beyond that. Offsetting this, it had US$108.8m in cash and US$265.3m in receivables that were due within 12 months. So it can boast US$148.3m more liquid assets than total liabilities.

This surplus suggests that Stella International Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Stella International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Stella International Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Stella International Holdings made a loss at the EBIT level, and saw its revenue drop to US$1.1b, which is a fall of 26%. That makes us nervous, to say the least.

So How Risky Is Stella International Holdings?

Although Stella International Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of US$1.7m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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, we've discovered 2 warning signs for Stella International Holdings that you should be aware of before investing here.

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. 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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