Would Success Universe Group (HKG:487) Be Better Off With Less Debt?

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 Success Universe Group Limited (HKG:487) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Success Universe Group

How Much Debt Does Success Universe Group Carry?

As you can see below, at the end of December 2022, Success Universe Group had HK$528.5m of debt, up from HK$362.5m a year ago. Click the image for more detail. On the flip side, it has HK$240.7m in cash leading to net debt of about HK$287.8m.

How Healthy Is Success Universe Group's Balance Sheet?

The latest balance sheet data shows that Success Universe Group had liabilities of HK$335.6m due within a year, and liabilities of HK$216.2m falling due after that. Offsetting these obligations, it had cash of HK$240.7m as well as receivables valued at HK$11.5m due within 12 months. So it has liabilities totalling HK$299.6m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of HK$399.0m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Success Universe Group 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.

Over 12 months, Success Universe Group made a loss at the EBIT level, and saw its revenue drop to HK$115m, which is a fall of 24%. To be frank that doesn't bode well.

Caveat Emptor

While Success Universe Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping HK$43m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through HK$23m of cash over the last year. 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. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Success Universe Group (1 shouldn't be ignored!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.