These 4 Measures Indicate That Snack Empire Holdings (HKG:1843) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Snack Empire Holdings Limited (HKG:1843) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Snack Empire Holdings

What Is Snack Empire Holdings's Debt?

As you can see below, Snack Empire Holdings had S$2.40m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has S$23.3m in cash, leading to a S$20.9m net cash position.

How Strong Is Snack Empire Holdings's Balance Sheet?

The latest balance sheet data shows that Snack Empire Holdings had liabilities of S$4.12m due within a year, and liabilities of S$4.10m falling due after that. Offsetting this, it had S$23.3m in cash and S$4.28m in receivables that were due within 12 months. So it can boast S$19.3m more liquid assets than total liabilities.

This surplus liquidity suggests that Snack Empire Holdings's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. 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.

In fact Snack Empire Holdings's saving grace is its low debt levels, because its EBIT has tanked 58% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is Snack Empire 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Snack Empire Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Snack Empire Holdings recorded free cash flow of 35% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case Snack Empire Holdings has S$20.9m in net cash and a decent-looking balance sheet. So we don't have any problem with Snack Empire Holdings's use of debt. 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. To that end, you should learn about the 2 warning signs we've spotted with Snack Empire Holdings (including 1 which is is potentially serious) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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.
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