Is Sino Vision Worldwide Holdings (HKG:8086) Using Too Much Debt?

Simply Wall St
May 24, 2021
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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Sino Vision Worldwide Holdings Limited (HKG:8086) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Sino Vision Worldwide Holdings

What Is Sino Vision Worldwide Holdings's Debt?

The image below, which you can click on for greater detail, shows that Sino Vision Worldwide Holdings had debt of HK$70.6m at the end of December 2020, a reduction from HK$121.7m over a year. However, it also had HK$7.84m in cash, and so its net debt is HK$62.7m.

SEHK:8086 Debt to Equity History May 25th 2021

How Healthy Is Sino Vision Worldwide Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sino Vision Worldwide Holdings had liabilities of HK$135.4m due within 12 months and no liabilities due beyond that. Offsetting this, it had HK$7.84m in cash and HK$30.7m in receivables that were due within 12 months. So it has liabilities totalling HK$96.8m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's HK$64.6m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Sino Vision Worldwide Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Sino Vision Worldwide Holdings had a loss before interest and tax, and actually shrunk its revenue by 41%, to HK$84m. That makes us nervous, to say the least.

Caveat Emptor

While Sino Vision Worldwide Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping HK$63m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through HK$13m in negative free cash flow over the last year. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 5 warning signs for Sino Vision Worldwide Holdings you should be aware of, and 3 of them are a bit concerning.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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