Does Seamless Green China (Holdings) (HKG:8150) Have A Healthy Balance Sheet?

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. As with many other companies Seamless Green China (Holdings) Limited (HKG:8150) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Seamless Green China (Holdings)

What Is Seamless Green China (Holdings)'s Net Debt?

As you can see below, Seamless Green China (Holdings) had HK$30.6m of debt at December 2021, down from HK$76.5m a year prior. However, it does have HK$4.75m in cash offsetting this, leading to net debt of about HK$25.8m.

How Strong Is Seamless Green China (Holdings)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Seamless Green China (Holdings) had liabilities of HK$80.8m due within 12 months and liabilities of HK$1.68m due beyond that. Offsetting this, it had HK$4.75m in cash and HK$48.1m in receivables that were due within 12 months. So it has liabilities totalling HK$29.6m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of HK$41.1m, so it does suggest shareholders should keep an eye on Seamless Green China (Holdings)'s use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Seamless Green China (Holdings) will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Seamless Green China (Holdings) made a loss at the EBIT level, and saw its revenue drop to HK$111m, which is a fall of 22%. To be frank that doesn't bode well.

Caveat Emptor

While Seamless Green China (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. Indeed, it lost a very considerable HK$8.1m at the EBIT level. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of HK$12m. So to be blunt we do think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Seamless Green China (Holdings) (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.