Does Sun Entertainment Group (HKG:8082) Have A Healthy Balance Sheet?

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, Sun Entertainment Group Limited (HKG:8082) does carry debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Sun Entertainment Group

What Is Sun Entertainment Group's Net Debt?

As you can see below, at the end of December 2020, Sun Entertainment Group had HK$20.0m of debt, up from HK$335.0k a year ago. Click the image for more detail. But it also has HK$42.6m in cash to offset that, meaning it has HK$22.6m net cash.

How Strong Is Sun Entertainment Group's Balance Sheet?

We can see from the most recent balance sheet that Sun Entertainment Group had liabilities of HK$31.6m falling due within a year, and liabilities of HK$24.4m due beyond that. Offsetting these obligations, it had cash of HK$42.6m as well as receivables valued at HK$18.9m due within 12 months. So it can boast HK$5.58m more liquid assets than total liabilities.

This state of affairs indicates that Sun Entertainment Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the HK$350.2m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Sun Entertainment Group 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 Sun Entertainment 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.

Over 12 months, Sun Entertainment Group made a loss at the EBIT level, and saw its revenue drop to HK$29m, which is a fall of 77%. That makes us nervous, to say the least.

So How Risky Is Sun Entertainment Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Sun Entertainment Group had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through HK$4.2m of cash and made a loss of HK$31m. While this does make the company a bit risky, it's important to remember it has net cash of HK$22.6m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For example, we've discovered 3 warning signs for Sun Entertainment Group (1 is significant!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

When trading Sun Entertainment Group or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on 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.