Is S.A.I. Leisure Group (HKG:1832) Using Debt In A Risky Way?

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 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. We note that S.A.I. Leisure Group Company Limited (HKG:1832) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for S.A.I. Leisure Group

What Is S.A.I. Leisure Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 S.A.I. Leisure Group had US$77.9m of debt, an increase on US$69.1m, over one year. However, because it has a cash reserve of US$4.08m, its net debt is less, at about US$73.8m.

A Look At S.A.I. Leisure Group's Liabilities

According to the last reported balance sheet, S.A.I. Leisure Group had liabilities of US$77.2m due within 12 months, and liabilities of US$33.0m due beyond 12 months. Offsetting this, it had US$4.08m in cash and US$7.46m in receivables that were due within 12 months. So its liabilities total US$98.7m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$28.7m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, S.A.I. Leisure Group would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since S.A.I. Leisure Group 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.

Over 12 months, S.A.I. Leisure Group reported revenue of US$44m, which is a gain of 111%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

Despite the top line growth, S.A.I. Leisure Group still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$14m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through US$1.6m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for S.A.I. Leisure Group (2 are potentially serious!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.