Stock Analysis

Is Labixiaoxin Snacks Group (HKG:1262) A Risky Investment?

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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.' 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 note that Labixiaoxin Snacks Group Limited (HKG:1262) does have debt on its balance sheet. 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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Labixiaoxin Snacks Group

What Is Labixiaoxin Snacks Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Labixiaoxin Snacks Group had CN¥642.4m of debt in December 2020, down from CN¥705.6m, one year before. However, because it has a cash reserve of CN¥258.8m, its net debt is less, at about CN¥383.6m.

SEHK:1262 Debt to Equity History April 2nd 2021

How Strong Is Labixiaoxin Snacks Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Labixiaoxin Snacks Group had liabilities of CN¥1.05b due within 12 months and liabilities of CN¥15.8m due beyond that. Offsetting this, it had CN¥258.8m in cash and CN¥297.6m in receivables that were due within 12 months. So its liabilities total CN¥504.9m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥285.6m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Labixiaoxin Snacks Group 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 you can't view debt in total isolation; since Labixiaoxin Snacks Group 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.

In the last year Labixiaoxin Snacks Group wasn't profitable at an EBIT level, but managed to grow its revenue by 9.1%, to CN¥509m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Labixiaoxin Snacks Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥2.0m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of CN¥29m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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 - Labixiaoxin Snacks Group has 1 warning sign we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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