Is Sky Light Holdings (HKG:3882) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Sky Light Holdings Limited (HKG:3882) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Sky Light Holdings

What Is Sky Light Holdings's Net Debt?

As you can see below, Sky Light Holdings had HK$12.0m of debt at December 2020, down from HK$16.7m a year prior. But it also has HK$120.3m in cash to offset that, meaning it has HK$108.3m net cash.

How Healthy Is Sky Light Holdings' Balance Sheet?

According to the last reported balance sheet, Sky Light Holdings had liabilities of HK$217.6m due within 12 months, and liabilities of HK$25.1m due beyond 12 months. On the other hand, it had cash of HK$120.3m and HK$69.7m worth of receivables due within a year. So its liabilities total HK$52.7m more than the combination of its cash and short-term receivables.

Sky Light Holdings has a market capitalization of HK$181.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Sky Light Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Sky Light Holdings'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 Sky Light Holdings had a loss before interest and tax, and actually shrunk its revenue by 20%, to HK$437m. That makes us nervous, to say the least.

So How Risky Is Sky Light Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Sky Light Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through HK$10m of cash and made a loss of HK$64m. With only HK$108.3m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Sky Light Holdings is showing 2 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

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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