Is Stelux Holdings International (HKG:84) Using Debt In A Risky Way?

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.' 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 Stelux Holdings International Limited (HKG:84) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Stelux Holdings International

What Is Stelux Holdings International's Net Debt?

As you can see below, Stelux Holdings International had HK$628.9m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has HK$218.8m in cash leading to net debt of about HK$410.1m.

A Look At Stelux Holdings International's Liabilities

Zooming in on the latest balance sheet data, we can see that Stelux Holdings International had liabilities of HK$983.5m due within 12 months and liabilities of HK$110.9m due beyond that. On the other hand, it had cash of HK$218.8m and HK$117.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$758.3m.

The deficiency here weighs heavily on the HK$80.6m 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'd watch its balance sheet closely, without a doubt. After all, Stelux Holdings International would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Stelux Holdings International will need earnings to service that debt. 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.

In the last year Stelux Holdings International had a loss before interest and tax, and actually shrunk its revenue by 42%, to HK$756m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Stelux Holdings International's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping HK$258m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost HK$386m 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. Be aware that Stelux Holdings International is showing 2 warning signs in our investment analysis , and 1 of those is potentially serious...

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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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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