David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, Sino Golf Holdings Limited (HKG:361) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Sino Golf Holdings
What Is Sino Golf Holdings's Debt?
The image below, which you can click on for greater detail, shows that Sino Golf Holdings had debt of HK$135.1m at the end of June 2024, a reduction from HK$152.7m over a year. However, because it has a cash reserve of HK$122.9m, its net debt is less, at about HK$12.2m.
How Healthy Is Sino Golf Holdings' Balance Sheet?
According to the last reported balance sheet, Sino Golf Holdings had liabilities of HK$115.8m due within 12 months, and liabilities of HK$61.3m due beyond 12 months. On the other hand, it had cash of HK$122.9m and HK$30.3m worth of receivables due within a year. So it has liabilities totalling HK$23.9m more than its cash and near-term receivables, combined.
Of course, Sino Golf Holdings has a market capitalization of HK$202.8m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sino Golf Holdings 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.
Over 12 months, Sino Golf Holdings made a loss at the EBIT level, and saw its revenue drop to HK$235m, which is a fall of 27%. To be frank that doesn't bode well.
Caveat Emptor
Not only did Sino Golf Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at HK$4.2m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of HK$9.8m into a profit. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Sino Golf Holdings , and understanding them should be part of your investment process.
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.