Would S&P International Holding (HKG:1695) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, S&P International Holding Limited (HKG:1695) does carry debt. But the real question is whether this debt is making the company risky.

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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for S&P International Holding

How Much Debt Does S&P International Holding Carry?

The image below, which you can click on for greater detail, shows that at June 2020 S&P International Holding had debt of RM41.4m, up from RM23.8m in one year. However, because it has a cash reserve of RM32.3m, its net debt is less, at about RM9.07m.

A Look At S&P International Holding's Liabilities

The latest balance sheet data shows that S&P International Holding had liabilities of RM20.3m due within a year, and liabilities of RM34.3m falling due after that. Offsetting this, it had RM32.3m in cash and RM21.2m in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Since publicly traded S&P International Holding shares are worth a total of RM48.6m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 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 S&P International Holding wasn't profitable at an EBIT level, but managed to grow its revenue by 5.2%, to RM77m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, S&P International Holding had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping RM8.0m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of RM11m. So in short it's a really 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 instance, we've identified 2 warning signs for S&P International Holding (1 shouldn't be ignored) 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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