Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We note that Sun Limited Entertainment Group (HKG:8082) has a debt on its balance sheet. But should shareholders worry about its use of debt?
What risk does debt carry?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. If things go really bad, lenders can take over the business. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.
See our latest analysis for Sun Entertainment Group
How much debt does Sun Entertainment Group have?
You can click on the graph below for historical numbers, but it shows that as of December 2021, Sun Entertainment Group had HK$39.4 million in debt, an increase of HK$20.2 million, over a year. But he also has HK$125.7 million in cash to offset that, meaning he has a net cash of HK$86.3 million.
How healthy is Sun Entertainment Group’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Sun Entertainment Group had liabilities of HK$45.9 million due within 12 months and liabilities of HK$41.5 million due beyond. On the other hand, it had cash of HK$125.7 million and HK$14.2 million of receivables due within one year. He can therefore boast that he has HK$52.5 million more in liquid assets than total Passives.
This excess cash is a great indication that Sun Entertainment Group’s balance sheet is almost as strong as Fort Knox’s. Given this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Sun Entertainment Group has more cash than debt is arguably a good indication that it can safely manage its debt. There is no doubt that we learn the most about debt from the balance sheet. But it is the profits of Sun Entertainment Group that will influence the balance sheet in the future. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.
Year-over-year, Sun Entertainment Group reported revenue of HK$48 million, a gain of 36%, although it reported no earnings before interest and taxes. The shareholders probably have their fingers crossed that she can make a profit.
So how risky is Sun Entertainment Group?
By their very nature, companies that lose money are riskier than those with a long history of profitability. And we note that Sun Entertainment Group posted a loss in earnings before interest and taxes (EBIT) over the past year. And during the same period, it recorded a negative free cash outflow of HK$47 million and recorded a book loss of HK$75 million. But the saving grace is the HK$86.3 million on the balance sheet. This pot means that the company can continue to spend on growth for at least two years, at current rates. With very solid revenue growth over the past year, Sun Entertainment Group could be on the road to profitability. By investing before these profits, shareholders take on more risk in the hope of greater rewards. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. Know that Sun Entertainment Group is showing 4 warning signs in our investment analysis and 2 of them are a little concerning…
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.