Is Sino Gas Holdings Group (HKG:1759) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Sino Gas Holdings Group Limited (HKG:1759) does carry debt. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Sino Gas Holdings Group

How Much Debt Does Sino Gas Holdings Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Sino Gas Holdings Group had CN¥940.0m of debt, an increase on CN¥557.5m, over one year. However, it does have CN¥106.7m in cash offsetting this, leading to net debt of about CN¥833.3m.

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

We can see from the most recent balance sheet that Sino Gas Holdings Group had liabilities of CN¥975.2m falling due within a year, and liabilities of CN¥4.61m due beyond that. Offsetting these obligations, it had cash of CN¥106.7m as well as receivables valued at CN¥121.5m due within 12 months. So its liabilities total CN¥751.6m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥108.4m 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 Gas Holdings Group would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Sino Gas 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.

In the last year Sino Gas Holdings Group had a loss before interest and tax, and actually shrunk its revenue by 32%, to CN¥1.5b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Sino Gas Holdings Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥802k. 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 on the bright side the company actually produced a statutory profit of CN¥9.5m and free cash flow of CN¥893k. So its situation may not be as precarious as the EBIT would imply. 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 5 warning signs for Sino Gas Holdings Group (3 make us uncomfortable!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.