Sun Entertainment Group (HKG:8082) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Sun Entertainment Group Limited (HKG:8082) does have debt on its balance sheet. 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. 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.

See our latest analysis for Sun Entertainment Group

What Is Sun Entertainment Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Sun Entertainment Group had HK$39.4m of debt, an increase on HK$20.2m, over one year. But it also has HK$125.7m in cash to offset that, meaning it has HK$86.3m net cash.

How Healthy Is Sun Entertainment Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sun Entertainment Group had liabilities of HK$45.9m due within 12 months and liabilities of HK$41.5m due beyond that. On the other hand, it had cash of HK$125.7m and HK$14.2m worth of receivables due within a year. So it can boast HK$52.5m more liquid assets than total liabilities.

This excess liquidity is a great indication that Sun Entertainment Group's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Sun Entertainment Group has more cash than debt is arguably a good indication that it can manage its debt safely. 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 reported revenue of HK$48m, which is a gain of 36%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Sun Entertainment Group?

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 Sun Entertainment Group had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of HK$47m and booked a HK$75m accounting loss. But the saving grace is the HK$86.3m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Sun Entertainment Group may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Sun Entertainment Group is showing 4 warning signs in our investment analysis , and 2 of those are a bit concerning...

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.