Is SIM Technology Group (HKG:2000) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that SIM Technology Group Limited (HKG:2000) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 SIM Technology Group

What Is SIM Technology Group's Net Debt?

The image below, which you can click on for greater detail, shows that SIM Technology Group had debt of HK$33.0m at the end of December 2023, a reduction from HK$240.2m over a year. However, its balance sheet shows it holds HK$768.4m in cash, so it actually has HK$735.4m net cash.

A Look At SIM Technology Group's Liabilities

The latest balance sheet data shows that SIM Technology Group had liabilities of HK$395.4m due within a year, and liabilities of HK$135.0m falling due after that. Offsetting these obligations, it had cash of HK$768.4m as well as receivables valued at HK$420.4m due within 12 months. So it actually has HK$658.4m more liquid assets than total liabilities.

This luscious liquidity implies that SIM Technology 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. Simply put, the fact that SIM Technology Group has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since SIM Technology 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, SIM Technology Group made a loss at the EBIT level, and saw its revenue drop to HK$544m, which is a fall of 15%. That's not what we would hope to see.

So How Risky Is SIM Technology Group?

Although SIM Technology Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of HK$344m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. The next few years will be important as the business matures. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for SIM Technology Group you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com