Is Sunlight (1977) Holdings (HKG:8451) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Sunlight (1977) Holdings Limited (HKG:8451) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Sunlight (1977) Holdings

What Is Sunlight (1977) Holdings's Net Debt?

As you can see below, at the end of March 2021, Sunlight (1977) Holdings had S$7.17m of debt, up from S$556.0k a year ago. Click the image for more detail. However, because it has a cash reserve of S$3.01m, its net debt is less, at about S$4.15m.

How Healthy Is Sunlight (1977) Holdings' Balance Sheet?

According to the last reported balance sheet, Sunlight (1977) Holdings had liabilities of S$9.02m due within 12 months, and liabilities of S$1.50m due beyond 12 months. Offsetting these obligations, it had cash of S$3.01m as well as receivables valued at S$4.19m due within 12 months. So its liabilities total S$3.32m more than the combination of its cash and short-term receivables.

Sunlight (1977) Holdings has a market capitalization of S$7.10m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Sunlight (1977) 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 Sunlight (1977) Holdings had a loss before interest and tax, and actually shrunk its revenue by 37%, to S$11m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Sunlight (1977) Holdings'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 S$186k. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled S$2.4m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. Be aware that Sunlight (1977) Holdings is showing 3 warning signs in our investment analysis , and 2 of those don't sit too well with us...

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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