Is Stelux Holdings International (HKG:84) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Stelux Holdings International Limited (HKG:84) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Stelux Holdings International

What Is Stelux Holdings International's Debt?

You can click the graphic below for the historical numbers, but it shows that Stelux Holdings International had HK$512.8m of debt in March 2021, down from HK$651.4m, one year before. On the flip side, it has HK$220.3m in cash leading to net debt of about HK$292.5m.

A Look At Stelux Holdings International's Liabilities

According to the last reported balance sheet, Stelux Holdings International had liabilities of HK$765.3m due within 12 months, and liabilities of HK$97.9m due beyond 12 months. On the other hand, it had cash of HK$220.3m and HK$92.0m worth of receivables due within a year. So its liabilities total HK$550.9m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$89.0m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Stelux Holdings International would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is Stelux Holdings International'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.

Over 12 months, Stelux Holdings International made a loss at the EBIT level, and saw its revenue drop to HK$706m, which is a fall of 32%. To be frank that doesn't bode well.

Caveat Emptor

While Stelux Holdings International'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$167m. 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. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost HK$82m in the last year. So we're not very excited about owning this stock. Its too risky for us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Stelux Holdings International (including 1 which can't be ignored) .

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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