Is Shi Shi Services (HKG:8181) A Risky Investment?

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.' 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 can see that Shi Shi Services Limited (HKG:8181) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Shi Shi Services

What Is Shi Shi Services's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2022 Shi Shi Services had debt of HK$12.0m, up from HK$9.00m in one year. However, it does have HK$71.8m in cash offsetting this, leading to net cash of HK$59.8m.

A Look At Shi Shi Services' Liabilities

We can see from the most recent balance sheet that Shi Shi Services had liabilities of HK$75.5m falling due within a year, and liabilities of HK$7.81m due beyond that. On the other hand, it had cash of HK$71.8m and HK$94.8m worth of receivables due within a year. So it actually has HK$83.2m more liquid assets than total liabilities.

This luscious liquidity implies that Shi Shi Services' balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Shi Shi Services has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shi Shi Services'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.

Over 12 months, Shi Shi Services reported revenue of HK$545m, which is a gain of 5.2%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Shi Shi Services?

Although Shi Shi Services had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of HK$59m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. The next few years will be important as the business matures. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Shi Shi Services is showing 2 warning signs in our investment analysis , and 1 of those is concerning...

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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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.