We Think Seamless Green China (Holdings) (HKG:8150) Has A Fair Chunk Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that Seamless Green China (Holdings) Limited (HKG:8150) does have debt on its balance sheet. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Seamless Green China (Holdings)

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

You can click the graphic below for the historical numbers, but it shows that Seamless Green China (Holdings) had HK$33.9m of debt in June 2021, down from HK$48.7m, one year before. However, it does have HK$3.05m in cash offsetting this, leading to net debt of about HK$30.8m.

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$101.2m falling due within a year, and liabilities of HK$2.34m due beyond that. On the other hand, it had cash of HK$3.05m and HK$71.5m worth of receivables due within a year. So its liabilities total HK$29.0m more than the combination of its cash and short-term receivables.

Seamless Green China (Holdings) has a market capitalization of HK$55.0m, so it could very likely raise cash to ameliorate 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. 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 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 19%, to HK$149m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Seamless Green China (Holdings) had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping HK$8.1m. 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$14m. In the meantime, we consider the stock very 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 2 warning signs with Seamless Green China (Holdings) (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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.

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.