Is Wonderful Sky Financial Group Holdings (HKG:1260) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Wonderful Sky Financial Group Holdings Limited (HKG:1260) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Wonderful Sky Financial Group Holdings

What Is Wonderful Sky Financial Group Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Wonderful Sky Financial Group Holdings had debt of HK$159.4m at the end of September 2020, a reduction from HK$182.5m over a year. But it also has HK$516.9m in cash to offset that, meaning it has HK$357.4m net cash.

A Look At Wonderful Sky Financial Group Holdings's Liabilities

The latest balance sheet data shows that Wonderful Sky Financial Group Holdings had liabilities of HK$383.1m due within a year, and liabilities of HK$5.85m falling due after that. On the other hand, it had cash of HK$516.9m and HK$89.3m worth of receivables due within a year. So it can boast HK$217.2m more liquid assets than total liabilities.

This luscious liquidity implies that Wonderful Sky Financial Group Holdings's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Wonderful Sky Financial Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Wonderful Sky Financial Group Holdings'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.

Over 12 months, Wonderful Sky Financial Group Holdings made a loss at the EBIT level, and saw its revenue drop to HK$332m, which is a fall of 45%. That makes us nervous, to say the least.

So How Risky Is Wonderful Sky Financial Group Holdings?

While Wonderful Sky Financial Group Holdings lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of HK$34m. 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. 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 Wonderful Sky Financial Group Holdings (of which 1 is concerning!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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