Is SIM Technology Group (HKG:2000) Using Debt In A Risky Way?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, SIM Technology Group Limited (HKG:2000) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for SIM Technology Group

What Is SIM Technology Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 SIM Technology Group had HK$178.8m of debt, an increase on HK$133.2m, over one year. But on the other hand it also has HK$343.4m in cash, leading to a HK$164.7m net cash position.

How Healthy Is SIM Technology Group's Balance Sheet?

The latest balance sheet data shows that SIM Technology Group had liabilities of HK$475.2m due within a year, and liabilities of HK$140.9m falling due after that. On the other hand, it had cash of HK$343.4m and HK$145.0m worth of receivables due within a year. So its liabilities total HK$127.8m more than the combination of its cash and short-term receivables.

Of course, SIM Technology Group has a market capitalization of HK$690.0m, 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. Despite its noteworthy liabilities, SIM Technology Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since SIM Technology Group will need earnings to service that debt. 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 SIM Technology Group wasn't profitable at an EBIT level, but managed to grow its revenue by 6.3%, to HK$657m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is SIM Technology 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 SIM Technology Group had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of HK$316m and booked a HK$235m accounting loss. With only HK$164.7m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Case in point: We've spotted 2 warning signs for SIM Technology Group you should be aware of, and 1 of them is a bit concerning.

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.