Would Sing Lee Software (Group) (HKG:8076) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Sing Lee Software (Group) Limited (HKG:8076) does carry debt. 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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

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

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

As you can see below, Sing Lee Software (Group) had CN¥44.6m of debt at June 2021, down from CN¥66.9m a year prior. However, because it has a cash reserve of CN¥41.6m, its net debt is less, at about CN¥3.04m.

How Strong 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¥36.9m due within 12 months and liabilities of CN¥23.0m due beyond that. On the other hand, it had cash of CN¥41.6m and CN¥54.4m worth of receivables due within a year. So it can boast CN¥36.0m 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. Having regard to this fact, we think its balance sheet is as strong as an ox. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Sing Lee Software (Group)'s earnings that will influence how the balance sheet holds up in the future. 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) made a loss at the EBIT level, and saw its revenue drop to CN¥93m, which is a fall of 19%. That's not what we would hope to see.

Caveat Emptor

While Sing Lee Software (Group)'s falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable CN¥30m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. So it seems too risky for our taste. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example Sing Lee Software (Group) has 4 warning signs (and 2 which are a bit concerning) 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.
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