These 4 Measures Indicate That Sino Harbour Holdings Group (HKG:1663) Is Using Debt Reasonably Well

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Sino Harbour Holdings Group Limited (HKG:1663) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Sino Harbour Holdings Group

How Much Debt Does Sino Harbour Holdings Group Carry?

You can click the graphic below for the historical numbers, but it shows that Sino Harbour Holdings Group had CN¥304.7m of debt in September 2020, down from CN¥660.0m, one year before. However, its balance sheet shows it holds CN¥373.5m in cash, so it actually has CN¥68.8m net cash.

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

Zooming in on the latest balance sheet data, we can see that Sino Harbour Holdings Group had liabilities of CN¥2.50b due within 12 months and liabilities of CN¥323.5m due beyond that. On the other hand, it had cash of CN¥373.5m and CN¥24.8m worth of receivables due within a year. So its liabilities total CN¥2.43b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥294.0m 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sino Harbour Holdings Group 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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

Although Sino Harbour Holdings Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥68.8m. And it impressed us with free cash flow of CN¥173m, being 243% of its EBIT. So we are not troubled with Sino Harbour Holdings Group's debt use. 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. We've identified 3 warning signs with Sino Harbour Holdings Group (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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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