Is Shangri-La Asia (HKG:69) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Shangri-La Asia Limited (HKG:69) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Shangri-La Asia

How Much Debt Does Shangri-La Asia Carry?

As you can see below, at the end of December 2020, Shangri-La Asia had US$5.86b of debt, up from US$5.31b a year ago. Click the image for more detail. On the flip side, it has US$1.01b in cash leading to net debt of about US$4.86b.

How Strong Is Shangri-La Asia's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shangri-La Asia had liabilities of US$1.54b due within 12 months and liabilities of US$6.15b due beyond that. Offsetting these obligations, it had cash of US$1.01b as well as receivables valued at US$267.2m due within 12 months. So its liabilities total US$6.42b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$3.43b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Shangri-La Asia would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Shangri-La Asia can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Shangri-La Asia had a loss before interest and tax, and actually shrunk its revenue by 57%, to US$1.0b. To be frank that doesn't bode well.

Caveat Emptor

While Shangri-La Asia's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable US$463m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of US$484m over the last twelve months. So suffice it to say we consider the stock to be 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 be aware of the 1 warning sign we've spotted with Shangri-La Asia .

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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