Is Stelux Holdings International (HKG:84) Using Debt Sensibly?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Stelux Holdings International Limited (HKG:84) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

View our latest analysis for Stelux Holdings International

What Is Stelux Holdings International's Debt?

The image below, which you can click on for greater detail, shows that Stelux Holdings International had debt of HK$492.3m at the end of September 2021, a reduction from HK$628.9m over a year. However, it also had HK$168.0m in cash, and so its net debt is HK$324.3m.

How Healthy Is Stelux Holdings International's Balance Sheet?

We can see from the most recent balance sheet that Stelux Holdings International had liabilities of HK$747.4m falling due within a year, and liabilities of HK$88.9m due beyond that. Offsetting these obligations, it had cash of HK$168.0m as well as receivables valued at HK$81.7m due within 12 months. So it has liabilities totalling HK$586.6m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$70.1m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. 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$697m, which is a fall of 7.8%. We would much prefer see growth.

Caveat Emptor

Importantly, Stelux Holdings International had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping HK$145m. 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. 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$81m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Stelux Holdings International that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.