San Miguel Brewery Hong Kong (HKG:236) Has Debt But No Earnings; Should You Worry?

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 San Miguel Brewery Hong Kong Limited (HKG:236) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for San Miguel Brewery Hong Kong

What Is San Miguel Brewery Hong Kong's Debt?

The image below, which you can click on for greater detail, shows that San Miguel Brewery Hong Kong had debt of HK$92.9m at the end of December 2020, a reduction from HK$102.2m over a year. However, its balance sheet shows it holds HK$156.1m in cash, so it actually has HK$63.2m net cash.

How Strong Is San Miguel Brewery Hong Kong's Balance Sheet?

We can see from the most recent balance sheet that San Miguel Brewery Hong Kong had liabilities of HK$160.2m falling due within a year, and liabilities of HK$40.6m due beyond that. Offsetting these obligations, it had cash of HK$156.1m as well as receivables valued at HK$59.5m due within 12 months. So it actually has HK$14.9m more liquid assets than total liabilities.

This surplus suggests that San Miguel Brewery Hong Kong has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, San Miguel Brewery Hong Kong boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is San Miguel Brewery Hong Kong'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.

In the last year San Miguel Brewery Hong Kong had a loss before interest and tax, and actually shrunk its revenue by 4.2%, to HK$556m. We would much prefer see growth.

So How Risky Is San Miguel Brewery Hong Kong?

While San Miguel Brewery Hong Kong lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of HK$17m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for San Miguel Brewery Hong Kong you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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