These 4 Measures Indicate That Speedy Global Holdings (HKG:540) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. 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?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, 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.

Check out 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$93.7m at the end of June 2024, a reduction from HK$140.8m over a year. However, its balance sheet shows it holds HK$104.3m in cash, so it actually has HK$10.6m net cash.

How Strong Is Speedy Global Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Speedy Global Holdings had liabilities of HK$273.8m due within 12 months and liabilities of HK$1.47m due beyond that. Offsetting these obligations, it had cash of HK$104.3m as well as receivables valued at HK$103.1m due within 12 months. So its liabilities total HK$67.9m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Speedy Global Holdings has a market capitalization of HK$119.4m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Speedy Global Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Pleasingly, Speedy Global Holdings is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 136% gain in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Speedy Global 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Speedy Global Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Speedy Global Holdings actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Speedy Global Holdings does have more liabilities than liquid assets, it also has net cash of HK$10.6m. The cherry on top was that in converted 661% of that EBIT to free cash flow, bringing in HK$38m. So we don't have any problem with Speedy Global Holdings's use of debt. 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. We've identified 2 warning signs with Speedy Global Holdings (at least 1 which is significant) , and understanding them should be part of your investment process.

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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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.