Health Check: How Prudently Does Speedy Global Holdings (HKG:540) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Speedy Global Holdings Limited (HKG:540) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

See our latest analysis for Speedy Global Holdings

What Is Speedy Global Holdings's Debt?

The image below, which you can click on for greater detail, shows that Speedy Global Holdings had debt of HK$105.9m at the end of June 2022, a reduction from HK$153.7m over a year. However, it does have HK$129.7m in cash offsetting this, leading to net cash of HK$23.8m.

How Strong Is Speedy Global Holdings' Balance Sheet?

According to the last reported balance sheet, Speedy Global Holdings had liabilities of HK$279.6m due within 12 months, and liabilities of HK$3.35m due beyond 12 months. Offsetting this, it had HK$129.7m in cash and HK$66.6m in receivables that were due within 12 months. So its liabilities total HK$86.7m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of HK$102.6m, so it does suggest shareholders should keep an eye on Speedy Global Holdings' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Speedy Global 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 you can't view debt in total isolation; since Speedy Global Holdings will need earnings to service that debt. 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 Speedy Global Holdings had a loss before interest and tax, and actually shrunk its revenue by 12%, to HK$650m. We would much prefer see growth.

So How Risky Is Speedy Global Holdings?

Although Speedy Global Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of HK$25m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Speedy Global Holdings (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.