We Think Sing Lee Software (Group) (HKG:8076) Has A Fair Chunk Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Sing Lee Software (Group) Limited (HKG:8076) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Sing Lee Software (Group) had CN¥33.7m of debt, an increase on CN¥30.4m, over one year. On the flip side, it has CN¥21.2m in cash leading to net debt of about CN¥12.5m.

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

Zooming in on the latest balance sheet data, we can see that Sing Lee Software (Group) had liabilities of CN¥23.3m due within 12 months and liabilities of CN¥21.1m due beyond that. Offsetting this, it had CN¥21.2m in cash and CN¥19.1m in receivables that were due within 12 months. So it has liabilities totalling CN¥4.03m more than its cash and near-term receivables, combined.

Of course, Sing Lee Software (Group) has a market capitalization of CN¥30.8m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year Sing Lee Software (Group)'s revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Sing Lee Software (Group) had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CN¥33m at the EBIT level. 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. Another cause for caution is that is bled CN¥11m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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 instance, we've identified 4 warning signs for Sing Lee Software (Group) that 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.

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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.