Does eSun Holdings (HKG:571) Have A Healthy Balance Sheet?

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. As with many other companies eSun Holdings Limited (HKG:571) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for eSun Holdings

How Much Debt Does eSun Holdings Carry?

As you can see below, eSun Holdings had HK$389.1m of debt at January 2021, down from HK$10.5b a year prior. However, it does have HK$1.78b in cash offsetting this, leading to net cash of HK$1.39b.

How Healthy Is eSun Holdings' Balance Sheet?

The latest balance sheet data shows that eSun Holdings had liabilities of HK$1.13b due within a year, and liabilities of HK$1.19b falling due after that. Offsetting these obligations, it had cash of HK$1.78b as well as receivables valued at HK$99.1m due within 12 months. So it has liabilities totalling HK$443.5m more than its cash and near-term receivables, combined.

This deficit isn't so bad because eSun Holdings is worth HK$1.07b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, eSun Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since eSun Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year eSun Holdings's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

So How Risky Is eSun Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that eSun Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through HK$345m of cash and made a loss of HK$572m. With only HK$1.39b on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with eSun Holdings (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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