Is China Sandi Holdings (HKG:910) Using Debt Sensibly?

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.' 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. As with many other companies China Sandi Holdings Limited (HKG:910) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for China Sandi Holdings

What Is China Sandi Holdings's Debt?

The image below, which you can click on for greater detail, shows that China Sandi Holdings had debt of CN¥6.98b at the end of June 2024, a reduction from CN¥7.74b over a year. And it doesn't have much cash, so its net debt is about the same.

How Strong Is China Sandi Holdings' Balance Sheet?

The latest balance sheet data shows that China Sandi Holdings had liabilities of CN¥16.4b due within a year, and liabilities of CN¥2.49b falling due after that. On the other hand, it had cash of CN¥38.0m and CN¥1.43b worth of receivables due within a year. So its liabilities total CN¥17.5b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥152.6m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, China Sandi Holdings would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since China Sandi 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 China Sandi Holdings had a loss before interest and tax, and actually shrunk its revenue by 52%, to CN¥2.1b. To be frank that doesn't bode well.

Caveat Emptor

Not only did China Sandi Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CN¥161m. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it burned through CN¥10m in the last year. So we consider this a high risk stock, and we're worried its share price could sink faster than than a dingy with a great white shark attacking it. 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. For example, we've discovered 4 warning signs for China Sandi Holdings (3 are a bit concerning!) that you should be aware of before investing here.

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.

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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.