Seamless Green China (Holdings) (HKG:8150) Is Making Moderate Use Of Debt

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 note that Seamless Green China (Holdings) Limited (HKG:8150) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at 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$29.6m of debt at June 2021, down from HK$48.7m a year prior. On the flip side, it has HK$3.05m in cash leading to net debt of about HK$26.6m.

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

We can see from the most recent balance sheet that Seamless Green China (Holdings) had liabilities of HK$101.2m falling due within a year, and liabilities of HK$2.34m due beyond that. Offsetting this, it had HK$3.05m in cash and HK$71.5m in receivables that were due within 12 months. So its liabilities total HK$29.0m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Seamless Green China (Holdings) has a market capitalization of HK$81.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Seamless Green China (Holdings)'s earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Seamless Green China (Holdings) wasn't profitable at an EBIT level, but managed to grow its revenue by 65%, to HK$189m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Seamless Green China (Holdings) still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at HK$2.5m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of HK$9.9m. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Seamless Green China (Holdings) you should be aware of.

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.

When trading stocks or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*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.