Snack Empire Holdings (HKG:1843) Could Easily Take On More Debt

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.' 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. As with many other companies Snack Empire Holdings Limited (HKG:1843) 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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Snack Empire Holdings

How Much Debt Does Snack Empire Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Snack Empire Holdings had S$2.21m of debt in March 2022, down from S$2.34m, one year before. But it also has S$28.4m in cash to offset that, meaning it has S$26.2m net cash.

How Healthy Is Snack Empire Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Snack Empire Holdings had liabilities of S$4.73m due within 12 months and liabilities of S$3.51m due beyond that. Offsetting these obligations, it had cash of S$28.4m as well as receivables valued at S$425.0k due within 12 months. So it actually has S$20.6m more liquid assets than total liabilities.

This surplus strongly suggests that Snack Empire Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Snack Empire Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Snack Empire Holdings grew its EBIT by 185% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Snack Empire Holdings will need earnings to service that debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Snack Empire 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, Snack Empire Holdings actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Snack Empire Holdings has S$26.2m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 183% of that EBIT to free cash flow, bringing in S$4.9m. At the end of the day we're not concerned about Snack Empire Holdings's debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Snack Empire Holdings (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

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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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.