Is Sino-Life Group (HKG:8296) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Sino-Life Group Limited (HKG:8296) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Sino-Life Group

How Much Debt Does Sino-Life Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Sino-Life Group had CN¥16.7m of debt, an increase on CN¥4.43m, over one year. But on the other hand it also has CN¥164.1m in cash, leading to a CN¥147.4m net cash position.

How Healthy Is Sino-Life Group's Balance Sheet?

The latest balance sheet data shows that Sino-Life Group had liabilities of CN¥128.7m due within a year, and liabilities of CN¥27.4m falling due after that. On the other hand, it had cash of CN¥164.1m and CN¥548.0k worth of receivables due within a year. So it can boast CN¥8.55m more liquid assets than total liabilities.

It's good to see that Sino-Life Group has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Sino-Life Group boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Sino-Life Group'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.

In the last year Sino-Life Group had a loss before interest and tax, and actually shrunk its revenue by 19%, to CN¥66m. That's not what we would hope to see.

So How Risky Is Sino-Life Group?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Sino-Life Group lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥21m of cash and made a loss of CN¥12m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥147.4m. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Be aware that Sino-Life Group is showing 4 warning signs in our investment analysis , and 3 of those are a bit 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.