Is Sling Group Holdings (HKG:8285) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Sling Group Holdings Limited (HKG:8285) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Sling Group Holdings

What Is Sling Group Holdings's Net Debt?

As you can see below, at the end of June 2022, Sling Group Holdings had CN¥20.4m of debt, up from CN¥16.5m a year ago. Click the image for more detail. However, it does have CN¥6.99m in cash offsetting this, leading to net debt of about CN¥13.4m.

A Look At Sling Group Holdings' Liabilities

The latest balance sheet data shows that Sling Group Holdings had liabilities of CN¥45.5m due within a year, and liabilities of CN¥314.0k falling due after that. Offsetting these obligations, it had cash of CN¥6.99m as well as receivables valued at CN¥3.79m due within 12 months. So its liabilities total CN¥35.0m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of CN¥26.8m, we think shareholders really should watch Sling Group Holdings's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Sling Group 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, Sling Group Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥110m, which is a fall of 5.5%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Sling Group Holdings produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CN¥18m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through CN¥10m in negative free cash flow over the last year. So suffice it to say we 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. We've identified 3 warning signs with Sling Group Holdings , 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.

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.