Seamless Green China (Holdings) (HKG:8150) Has Debt But No Earnings; Should You Worry?

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.' 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. We can see that Seamless Green China (Holdings) Limited (HKG:8150) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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.

Check out our latest analysis for Seamless Green China (Holdings)

How Much Debt Does Seamless Green China (Holdings) Carry?

You can click the graphic below for the historical numbers, but it shows that Seamless Green China (Holdings) had HK$18.9m of debt in June 2022, down from HK$29.6m, one year before. On the flip side, it has HK$4.22m in cash leading to net debt of about HK$14.7m.

A Look At Seamless Green China (Holdings)'s Liabilities

We can see from the most recent balance sheet that Seamless Green China (Holdings) had liabilities of HK$88.3m falling due within a year, and liabilities of HK$1.67m due beyond that. Offsetting these obligations, it had cash of HK$4.22m as well as receivables valued at HK$56.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$29.0m.

When you consider that this deficiency exceeds the company's HK$28.3m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But it is Seamless Green China (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 Seamless Green China (Holdings) had a loss before interest and tax, and actually shrunk its revenue by 52%, to HK$90m. 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. Its EBIT loss was a whopping HK$13m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through HK$3.7m in negative free cash flow over the last year. That means it's on the risky side of things. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Seamless Green China (Holdings) (of which 2 make us uncomfortable!) you should know about.

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.

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.