Success Dragon International Holdings (HKG:1182) Is Carrying A Fair Bit Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Success Dragon International Holdings Limited (HKG:1182) does carry debt. 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.

See our latest analysis for Success Dragon International Holdings

What Is Success Dragon International Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Success Dragon International Holdings had HK$29.8m of debt, an increase on HK$27.4m, over one year. However, it also had HK$6.07m in cash, and so its net debt is HK$23.7m.

How Strong Is Success Dragon International Holdings's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Success Dragon International Holdings had liabilities of HK$38.9m due within 12 months and liabilities of HK$2.32m due beyond that. Offsetting these obligations, it had cash of HK$6.07m as well as receivables valued at HK$45.7m due within 12 months. So it can boast HK$10.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Success Dragon International 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 you can't view debt in total isolation; since Success Dragon International Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Success Dragon International Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 10%, to HK$98m. 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 Success Dragon International Holdings produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at HK$8.8m. 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. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. So it seems too risky for our taste. 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. Be aware that Success Dragon International Holdings is showing 3 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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