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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Snack Empire Holdings Limited (HKG:1843) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Snack Empire Holdings

What Is Snack Empire Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Snack Empire Holdings had debt of S$2.27m at the end of September 2021, a reduction from S$2.40m over a year. But on the other hand it also has S$27.1m in cash, leading to a S$24.9m net cash position.

A Look At Snack Empire Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Snack Empire Holdings had liabilities of S$4.60m due within 12 months and liabilities of S$4.08m due beyond that. Offsetting this, it had S$27.1m in cash and S$1.98m in receivables that were due within 12 months. So it can boast S$20.4m more liquid assets than total liabilities.

This excess liquidity is a great indication that Snack Empire Holdings' balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Snack Empire Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Snack Empire Holdings's load is not too heavy, because its EBIT was down 45% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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. 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. Happily for any shareholders, Snack Empire Holdings actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Snack Empire Holdings has net cash of S$24.9m, as well as more liquid assets than liabilities. The cherry on top was that in converted 113% of that EBIT to free cash flow, bringing in S$5.4m. So is Snack Empire Holdings's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Snack Empire Holdings (of which 1 is a bit unpleasant!) you should know about.

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. 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.