Is SIM Technology Group (HKG:2000) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies SIM Technology Group Limited (HKG:2000) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for SIM Technology Group

What Is SIM Technology Group's Net Debt?

As you can see below, at the end of December 2021, SIM Technology Group had HK$41.9m of debt, up from HK$36.0m a year ago. Click the image for more detail. But on the other hand it also has HK$679.6m in cash, leading to a HK$637.8m net cash position.

A Look At SIM Technology Group's Liabilities

Zooming in on the latest balance sheet data, we can see that SIM Technology Group had liabilities of HK$485.2m due within 12 months and liabilities of HK$203.8m due beyond that. Offsetting these obligations, it had cash of HK$679.6m as well as receivables valued at HK$232.0m due within 12 months. So it actually has HK$222.7m more liquid assets than total liabilities.

This luscious liquidity implies that SIM Technology 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. Succinctly put, 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 it is SIM Technology 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 SIM Technology Group wasn't profitable at an EBIT level, but managed to grow its revenue by 2.0%, to HK$725m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is SIM Technology Group?

Statistically speaking companies that lose money are riskier than those that make money. 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$185m and booked a HK$237m accounting loss. Given it only has net cash of HK$637.8m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example SIM Technology Group has 3 warning signs (and 1 which can't be ignored) we think you should know about.

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.