Is Shi Shi Services (HKG:8181) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Shi Shi Services Limited (HKG:8181) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Shi Shi Services

What Is Shi Shi Services's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Shi Shi Services had HK$18.2m of debt in March 2023, down from HK$19.1m, one year before. But on the other hand it also has HK$92.5m in cash, leading to a HK$74.3m net cash position.

How Healthy Is Shi Shi Services' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shi Shi Services had liabilities of HK$78.1m due within 12 months and liabilities of HK$9.60m due beyond that. Offsetting this, it had HK$92.5m in cash and HK$105.8m in receivables that were due within 12 months. So it can boast HK$110.6m more liquid assets than total liabilities.

This surplus liquidity suggests that Shi Shi Services' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Shi Shi Services boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Shi Shi Services 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, Shi Shi Services reported revenue of HK$560m, which is a gain of 5.2%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Shi Shi Services?

While Shi Shi Services lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$12m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. There's no doubt the next few years will be crucial to how the business matures. 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 - Shi Shi Services has 2 warning signs we think you should be aware of.

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.