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.' 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, Sunlight (1977) Holdings Limited (HKG:8451) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Debt?

The image below, which you can click on for greater detail, shows that at March 2021 Sunlight (1977) Holdings had debt of S$7.17m, up from S$556.0k in one year. On the flip side, it has S$3.01m in cash leading to net debt of about S$4.15m.

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

We can see from the most recent balance sheet that Sunlight (1977) Holdings had liabilities of S$9.02m falling due within a year, and liabilities of S$1.50m due beyond that. Offsetting this, it had S$3.01m in cash and S$4.19m in receivables that were due within 12 months. So its liabilities total S$3.32m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Sunlight (1977) Holdings has a market capitalization of S$8.22m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. 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 24%, to S$11m. To be frank that doesn't bode well.

Caveat Emptor

While Sunlight (1977) 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. To be specific the EBIT loss came in at S$172k. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through S$2.4m of cash over the last year. So in short it's a really risky stock. 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. For example Sunlight (1977) Holdings has 3 warning signs (and 2 which can't be ignored) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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