Stock Analysis

Is Sinolink Worldwide Holdings (HKG:1168) Weighed On By Its Debt Load?

SEHK:1168
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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 Sinolink Worldwide Holdings Limited (HKG:1168) makes use of debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

View our latest analysis for Sinolink Worldwide Holdings

What Is Sinolink Worldwide Holdings's Debt?

The image below, which you can click on for greater detail, shows that Sinolink Worldwide Holdings had debt of HK$753.1m at the end of June 2021, a reduction from HK$797.0m over a year. But it also has HK$1.39b in cash to offset that, meaning it has HK$639.6m net cash.

debt-equity-history-analysis
SEHK:1168 Debt to Equity History September 20th 2021

A Look At Sinolink Worldwide Holdings' Liabilities

The latest balance sheet data shows that Sinolink Worldwide Holdings had liabilities of HK$2.01b due within a year, and liabilities of HK$1.17b falling due after that. On the other hand, it had cash of HK$1.39b and HK$308.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$1.48b.

This is a mountain of leverage relative to its market capitalization of HK$1.57b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Sinolink Worldwide 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 it is Sinolink Worldwide Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Sinolink Worldwide Holdings reported revenue of HK$230m, which is a gain of 776%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

So How Risky Is Sinolink Worldwide Holdings?

Although Sinolink Worldwide Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of HK$262m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The good news for Sinolink Worldwide Holdings shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn't change our opinion that the stock is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Sinolink Worldwide Holdings (at least 2 which are a bit unpleasant) , 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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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.
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