Is Sing Lee Software (Group) (HKG:8076) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Sing Lee Software (Group) Limited (HKG:8076) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See 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¥30.4m of debt in December 2021, down from CN¥63.8m, one year before. However, it does have CN¥45.1m in cash offsetting this, leading to net cash of CN¥14.8m.

How Healthy Is Sing Lee Software (Group)'s Balance Sheet?

We can see from the most recent balance sheet that Sing Lee Software (Group) had liabilities of CN¥30.2m falling due within a year, and liabilities of CN¥17.9m due beyond that. On the other hand, it had cash of CN¥45.1m and CN¥33.0m worth of receivables due within a year. So it can boast CN¥30.1m more liquid assets than total liabilities.

This luscious liquidity implies that Sing Lee Software (Group)'s balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Sing Lee Software (Group) boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Sing Lee Software (Group)'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 Sing Lee Software (Group) wasn't profitable at an EBIT level, but managed to grow its revenue by 10%, to CN¥94m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Sing Lee Software (Group)?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Sing Lee Software (Group) had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥12m of cash and made a loss of CN¥14m. Given it only has net cash of CN¥14.8m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Sing Lee Software (Group) has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.