Is Sky Light Holdings (HKG:3882) Weighed On By Its Debt Load?

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. Importantly, Sky Light Holdings Limited (HKG:3882) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for Sky Light Holdings

What Is Sky Light Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Sky Light Holdings had debt of HK$14.7m, up from HK$8.04m in one year. However, its balance sheet shows it holds HK$40.7m in cash, so it actually has HK$26.0m 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$212.3m falling due within a year, and liabilities of HK$20.5m due beyond that. Offsetting this, it had HK$40.7m in cash and HK$56.8m in receivables that were due within 12 months. So it has liabilities totalling HK$135.3m more than its cash and near-term receivables, combined.

Since publicly traded Sky Light Holdings shares are worth a total of HK$1.70b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Sky Light Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Sky Light Holdings made a loss at the EBIT level, and saw its revenue drop to HK$322m, which is a fall of 23%. 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$97m of cash and made a loss of HK$81m. Given it only has net cash of HK$26.0m, the company may need to raise more capital if it doesn't reach break-even 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. To that end, you should learn about the 4 warning signs we've spotted with Sky Light Holdings (including 3 which are potentially serious) .

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. 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.