Speedy Global Holdings (HKG:540) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Speedy Global Holdings Limited (HKG:540) does use debt in its business. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Speedy Global Holdings

What Is Speedy Global Holdings's Debt?

As you can see below, Speedy Global Holdings had HK$153.7m of debt at June 2021, down from HK$179.9m a year prior. On the flip side, it has HK$137.4m in cash leading to net debt of about HK$16.3m.

A Look At Speedy Global Holdings' Liabilities

According to the last reported balance sheet, Speedy Global Holdings had liabilities of HK$330.5m due within 12 months, and liabilities of HK$7.66m due beyond 12 months. Offsetting this, it had HK$137.4m in cash and HK$93.1m in receivables that were due within 12 months. So its liabilities total HK$107.7m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of HK$118.8m, 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. There's no doubt that we learn most about debt from the balance sheet. But it is Speedy Global 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 Speedy Global Holdings had a loss before interest and tax, and actually shrunk its revenue by 24%, to HK$735m. To be frank that doesn't bode well.

Caveat Emptor

While Speedy Global Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping HK$21m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through HK$1.7m of cash over the last year. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Speedy Global Holdings you should be aware of, and 1 of them is concerning.

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.
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