Here's Why State Energy Group International Assets Holdings (HKG:918) Can Afford Some Debt

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. We note that State Energy Group International Assets Holdings Limited (HKG:918) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for State Energy Group International Assets Holdings

How Much Debt Does State Energy Group International Assets Holdings Carry?

As you can see below, State Energy Group International Assets Holdings had HK$42.0m of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had HK$29.7m in cash, and so its net debt is HK$12.2m.

How Healthy Is State Energy Group International Assets Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that State Energy Group International Assets Holdings had liabilities of HK$117.6m due within 12 months and liabilities of HK$6.06m due beyond that. Offsetting this, it had HK$29.7m in cash and HK$118.0m in receivables that were due within 12 months. So it actually has HK$24.1m more liquid assets than total liabilities.

This short term liquidity is a sign that State Energy Group International Assets Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. There's no doubt that we learn most about debt from the balance sheet. But it is State Energy Group International Assets 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.

Over 12 months, State Energy Group International Assets Holdings reported revenue of HK$246m, which is a gain of 19%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months State Energy Group International Assets Holdings produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at HK$61m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. This one is a bit too risky for our liking. 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 3 warning signs we've spotted with State Energy Group International Assets Holdings (including 2 which are a bit unpleasant) .

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.

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.