Here's Why S&P International Holding (HKG:1695) Can Afford Some 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.' 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 S&P International Holding Limited (HKG:1695) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for S&P International Holding

What Is S&P International Holding's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 S&P International Holding had RM37.4m of debt, an increase on RM33.6m, over one year. On the flip side, it has RM32.6m in cash leading to net debt of about RM4.76m.

A Look At S&P International Holding's Liabilities

We can see from the most recent balance sheet that S&P International Holding had liabilities of RM17.0m falling due within a year, and liabilities of RM31.8m due beyond that. Offsetting these obligations, it had cash of RM32.6m as well as receivables valued at RM15.3m due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to S&P International Holding's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the RM56.3m company is struggling for cash, we still think it's worth monitoring its balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But it is S&P International Holding's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, S&P International Holding reported revenue of RM89m, which is a gain of 30%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though S&P International Holding managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at RM1.2m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of RM3.0m into a profit. So to be blunt we do think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for S&P International Holding you should be aware of, and 1 of them is significant.

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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