Sino Harbour Holdings Group (HKG:1663) Has A Pretty Healthy Balance Sheet

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.' 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. We can see that Sino Harbour Holdings Group Limited (HKG:1663) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Sino Harbour Holdings Group

What Is Sino Harbour Holdings Group's Net Debt?

As you can see below, Sino Harbour Holdings Group had CN¥304.7m of debt at September 2020, down from CN¥660.0m a year prior. But on the other hand it also has CN¥373.5m in cash, leading to a CN¥68.8m net cash position.

How Strong Is Sino Harbour Holdings Group's Balance Sheet?

According to the last reported balance sheet, Sino Harbour Holdings Group had liabilities of CN¥2.50b due within 12 months, and liabilities of CN¥323.5m due beyond 12 months. Offsetting these obligations, it had cash of CN¥373.5m as well as receivables valued at CN¥24.8m due within 12 months. So it has liabilities totalling CN¥2.43b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CN¥273.9m 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. After all, Sino Harbour Holdings Group would likely require a major re-capitalisation if it had to pay its creditors today. Sino Harbour Holdings Group boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

Even more impressive was the fact that Sino Harbour Holdings Group grew its EBIT by 150% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is Sino Harbour Holdings 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Sino Harbour Holdings Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Sino Harbour Holdings Group actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While Sino Harbour Holdings Group does have more liabilities than liquid assets, it also has net cash of CN¥68.8m. The cherry on top was that in converted 243% of that EBIT to free cash flow, bringing in CN¥173m. So we are not troubled with Sino Harbour Holdings Group's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Sino Harbour Holdings Group (1 is significant!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.
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