Is Symphony Holdings (HKG:1223) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Symphony Holdings Limited (HKG:1223) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Symphony Holdings

How Much Debt Does Symphony Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Symphony Holdings had HK$1.62b of debt, an increase on HK$1.42b, over one year. However, it also had HK$348.5m in cash, and so its net debt is HK$1.28b.

How Healthy Is Symphony Holdings' Balance Sheet?

The latest balance sheet data shows that Symphony Holdings had liabilities of HK$925.6m due within a year, and liabilities of HK$1.50b falling due after that. Offsetting this, it had HK$348.5m in cash and HK$449.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$1.62b.

This deficit is considerable relative to its market capitalization of HK$2.50b, so it does suggest shareholders should keep an eye on Symphony Holdings' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Symphony 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.

Over 12 months, Symphony Holdings made a loss at the EBIT level, and saw its revenue drop to HK$352m, which is a fall of 9.4%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Symphony Holdings produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at HK$72m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through HK$8.3m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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. Be aware that Symphony Holdings is showing 2 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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