Does Sky Light Holdings (HKG:3882) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, Sky Light Holdings Limited (HKG:3882) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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.

Our analysis indicates that 3882 is potentially overvalued!

How Much Debt Does Sky Light Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Sky Light Holdings had HK$23.9m of debt in June 2022, down from HK$36.9m, one year before. However, its balance sheet shows it holds HK$101.6m in cash, so it actually has HK$77.7m net cash.

How Healthy Is Sky Light Holdings' Balance Sheet?

We can see from the most recent balance sheet that Sky Light Holdings had liabilities of HK$213.9m falling due within a year, and liabilities of HK$11.6m due beyond that. Offsetting these obligations, it had cash of HK$101.6m as well as receivables valued at HK$84.9m due within 12 months. So its liabilities total HK$39.0m more than the combination of its cash and short-term receivables.

Of course, Sky Light Holdings has a market capitalization of HK$801.0m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Sky Light Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Sky Light 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, Sky Light Holdings reported revenue of HK$662m, which is a gain of 11%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Sky Light Holdings?

Although Sky Light Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of HK$5.9m. 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. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. Be aware that Sky Light Holdings is showing 3 warning signs in our investment analysis , and 1 of those is concerning...

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. 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.