Shi Shi Services (HKG:8181) Has A Rock Solid Balance Sheet

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. 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?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Shi Shi Services

What Is Shi Shi Services's Debt?

The image below, which you can click on for greater detail, shows that Shi Shi Services had debt of HK$11.7m at the end of March 2020, a reduction from HK$12.7m over a year. However, it does have HK$144.0m in cash offsetting this, leading to net cash of HK$132.3m.

A Look At Shi Shi Services's Liabilities

We can see from the most recent balance sheet that Shi Shi Services had liabilities of HK$92.4m falling due within a year, and liabilities of HK$2.39m due beyond that. Offsetting these obligations, it had cash of HK$144.0m as well as receivables valued at HK$124.4m due within 12 months. So it can boast HK$173.6m more liquid assets than total liabilities.

This excess liquidity is a great indication that Shi Shi Services's balance sheet is just as strong as racists are weak. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. 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.

Also positive, Shi Shi Services grew its EBIT by 25% in the last year, and that should make it easier to pay down debt, going forward. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Shi Shi Services may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Shi Shi Services's free cash flow amounted to 35% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Shi Shi Services has net cash of HK$132.3m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 25% over the last year. So is Shi Shi Services's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Shi Shi Services that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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.
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