Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Seamless Green China (Holdings) Limited (HKG:8150) does carry debt. But is this debt a concern to shareholders?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
What Is Seamless Green China (Holdings)'s Net Debt?
As you can see below, at the end of December 2020, Seamless Green China (Holdings) had HK$76.5m of debt, up from HK$46.2m a year ago. Click the image for more detail. However, it also had HK$11.2m in cash, and so its net debt is HK$65.3m.
A Look At Seamless Green China (Holdings)'s Liabilities
The latest balance sheet data shows that Seamless Green China (Holdings) had liabilities of HK$97.8m due within a year, and liabilities of HK$53.4m falling due after that. Offsetting this, it had HK$11.2m in cash and HK$85.9m in receivables that were due within 12 months. So it has liabilities totalling HK$54.1m more than its cash and near-term receivables, combined.
This deficit isn't so bad because Seamless Green China (Holdings) is worth HK$264.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. 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$142m, which is a fall of 3.1%. We would much prefer see growth.
Importantly, Seamless Green China (Holdings) had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost HK$8.0m 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. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of HK$11m into a profit. So we do think this stock is quite risky. 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 Seamless Green China (Holdings) that you should be aware of before investing here.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
If you decide to trade Seamless Green China (Holdings), use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account.
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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.