Here's Why Sing Lee Software (Group) (HKG:8076) Can Afford Some 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.' 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. We note that Sing Lee Software (Group) Limited (HKG:8076) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Sing Lee Software (Group)

What Is Sing Lee Software (Group)'s Net Debt?

You can click the graphic below for the historical numbers, but it shows that Sing Lee Software (Group) had CN¥30.0m of debt in June 2023, down from CN¥33.6m, one year before. However, it also had CN¥24.5m in cash, and so its net debt is CN¥5.42m.

A Look At Sing Lee Software (Group)'s Liabilities

Zooming in on the latest balance sheet data, we can see that Sing Lee Software (Group) had liabilities of CN¥12.0m due within 12 months and liabilities of CN¥26.5m due beyond that. Offsetting this, it had CN¥24.5m in cash and CN¥27.2m in receivables that were due within 12 months. So it actually has CN¥13.3m more liquid assets than total liabilities.

This excess liquidity is a great indication that Sing Lee Software (Group)'s balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. 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 Sing Lee Software (Group) 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, Sing Lee Software (Group) reported revenue of CN¥89m, which is a gain of 6.9%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Sing Lee Software (Group) had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CN¥2.3m. Having said that, the balance sheet has plenty of liquid assets for now. That should give the business time to grow its cashflow. While the stock is probably a bit risky, there may be an opportunity if the business itself improves, allowing the company to stage a recovery. 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. For example - Sing Lee Software (Group) has 2 warning signs we think you should be aware of.

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.

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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.