Success Universe Group (HKG:487) Is Making Moderate Use Of 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 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. Importantly, Success Universe Group Limited (HKG:487) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Success Universe Group

What Is Success Universe Group's Debt?

As you can see below, at the end of June 2023, Success Universe Group had HK$437.2m of debt, up from HK$363.5m a year ago. Click the image for more detail. However, it does have HK$239.4m in cash offsetting this, leading to net debt of about HK$197.8m.

How Healthy Is Success Universe Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Success Universe Group had liabilities of HK$298.4m due within 12 months and liabilities of HK$171.0m due beyond that. Offsetting these obligations, it had cash of HK$239.4m as well as receivables valued at HK$14.7m due within 12 months. So its liabilities total HK$215.3m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of HK$315.3m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is Success Universe Group'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.

In the last year Success Universe Group had a loss before interest and tax, and actually shrunk its revenue by 24%, to HK$129m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Success Universe Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable HK$41m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled HK$22m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. To that end, you should learn about the 3 warning signs we've spotted with Success Universe Group (including 1 which is potentially serious) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.