Is Sky Light Holdings (HKG:3882) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We note that Sky Light Holdings Limited (HKG:3882) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

Check out our latest analysis for Sky Light Holdings

What Is Sky Light Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that Sky Light Holdings had HK$21.3m of debt in June 2023, down from HK$23.9m, one year before. However, its balance sheet shows it holds HK$72.6m in cash, so it actually has HK$51.2m net cash.

A Look At Sky Light Holdings' Liabilities

We can see from the most recent balance sheet that Sky Light Holdings had liabilities of HK$200.2m falling due within a year, and liabilities of HK$15.4m due beyond that. On the other hand, it had cash of HK$72.6m and HK$61.2m worth of receivables due within a year. So it has liabilities totalling HK$81.8m more than its cash and near-term receivables, combined.

Of course, Sky Light Holdings has a market capitalization of HK$1.37b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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. There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year Sky Light Holdings had a loss before interest and tax, and actually shrunk its revenue by 55%, to HK$295m. To be frank that doesn't bode well.

So How Risky Is Sky Light Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Sky Light Holdings had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through HK$44m of cash and made a loss of HK$65m. With only HK$51.2m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Sky Light Holdings has 2 warning signs we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.