Is Sheen Tai Holdings Group (HKG:1335) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Sheen Tai Holdings Group Company Limited (HKG:1335) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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, 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 Sheen Tai Holdings Group

What Is Sheen Tai Holdings Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Sheen Tai Holdings Group had HK$54.8m of debt in June 2020, down from HK$125.7m, one year before. However, its balance sheet shows it holds HK$244.8m in cash, so it actually has HK$190.0m net cash.

A Look At Sheen Tai Holdings Group's Liabilities

We can see from the most recent balance sheet that Sheen Tai Holdings Group had liabilities of HK$214.1m falling due within a year, and liabilities of HK$26.2m due beyond that. On the other hand, it had cash of HK$244.8m and HK$202.8m worth of receivables due within a year. So it actually has HK$207.2m more liquid assets than total liabilities.

This surplus strongly suggests that Sheen Tai Holdings Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Sheen Tai Holdings Group has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Sheen Tai Holdings 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 Sheen Tai Holdings Group had a loss before interest and tax, and actually shrunk its revenue by 29%, to HK$326m. That makes us nervous, to say the least.

So How Risky Is Sheen Tai Holdings Group?

While Sheen Tai Holdings Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$143m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The next few years will be important as the business matures. 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. Like risks, for instance. Every company has them, and we've spotted 4 warning signs for Sheen Tai Holdings Group (of which 1 is potentially serious!) 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.

If you’re looking to trade Sheen Tai Holdings Group, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.