Is SRE Group (HKG:1207) Weighed On By Its Debt Load?

By
Simply Wall St
Published
December 10, 2021
SEHK:1207
Source: Shutterstock

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.' 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. We can see that SRE Group Limited (HKG:1207) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for SRE Group

How Much Debt Does SRE Group Carry?

The chart below, which you can click on for greater detail, shows that SRE Group had CN¥4.61b in debt in June 2021; about the same as the year before. On the flip side, it has CN¥235.3m in cash leading to net debt of about CN¥4.37b.

debt-equity-history-analysis
SEHK:1207 Debt to Equity History December 10th 2021

How Healthy Is SRE Group's Balance Sheet?

The latest balance sheet data shows that SRE Group had liabilities of CN¥5.22b due within a year, and liabilities of CN¥4.58b falling due after that. Offsetting these obligations, it had cash of CN¥235.3m as well as receivables valued at CN¥3.57b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥5.99b.

The deficiency here weighs heavily on the CN¥588.8m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, SRE Group would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since SRE Group will need earnings to service that debt. 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, SRE Group reported revenue of CN¥328m, which is a gain of 12%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months SRE Group produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CN¥182m. 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¥145m in the last year. So is this a high risk stock? We think so, and we'd avoid it. 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. For instance, we've identified 4 warning signs for SRE Group (2 make us uncomfortable) you should be aware of.

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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