Is Sands China (HKG:1928) Using Too Much Debt?

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.' 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. As with many other companies Sands China Ltd. (HKG:1928) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Sands China

How Much Debt Does Sands China Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Sands China had US$6.92b of debt, an increase on US$5.46b, over one year. On the flip side, it has US$861.0m in cash leading to net debt of about US$6.06b.

A Look At Sands China's Liabilities

Zooming in on the latest balance sheet data, we can see that Sands China had liabilities of US$1.41b due within 12 months and liabilities of US$7.21b due beyond that. Offsetting this, it had US$861.0m in cash and US$131.0m in receivables that were due within 12 months. So it has liabilities totalling US$7.63b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Sands China is worth a massive US$36.2b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Sands China's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Sands China had a loss before interest and tax, and actually shrunk its revenue by 81%, to US$1.7b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Sands China's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at US$1.2b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$1.8b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. For example, we've discovered 1 warning sign for Sands China that you should be aware of before investing here.

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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