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”. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We note that SSY Group Limited (HKG:2005) has a debt on its balance sheet. But should shareholders worry about its use of debt?
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. If things go really bad, lenders can take over the business. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth, without any negative consequences. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
Discover our latest analysis for SSY Group
What is the debt of the SSY group?
The image below, which you can click on for more details, shows that in December 2021, SSY Group had HK$3.10 billion in debt, up from HK$2.43 billion in one year . However, he also had HK$1.70 billion in cash, so his net debt is HK$1.40 billion.
A look at the liabilities of the SSY group
The latest balance sheet data shows that SSY Group had liabilities of HK$2.39 billion due within one year, and liabilities of HK$1.82 billion falling due by the after. As compensation for these obligations, it had cash of HK$1.70 billion as well as receivables valued at HK$2.13 billion maturing within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of HK$382.5 million.
Given that publicly traded SSY Group shares are worth a total of HK$10.7 billion, it seems unlikely that this level of liabilities will pose a major threat. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future.
In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). Thus, we consider debt to earnings with and without depreciation and amortization charges.
SSY Group has a low net debt to EBITDA ratio of just 0.99. And its EBIT covers its interest charges 28.5 times. One could therefore say that he is no more threatened by his debt than an elephant is by a mouse. On top of that, we are pleased to report that SSY Group increased its EBIT by 38%, reducing the specter of future debt repayments. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether SSY Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. It is therefore worth checking how much of this EBIT is supported by free cash flow. Over the past three years, the SSY Group has generated free cash flow of 9.9% of its EBIT, an uninspiring performance. For us, such a low cash conversion creates a bit of paranoia about the ability to extinguish the debt.
Our point of view
The good news is that SSY Group’s demonstrated ability to cover its interest charges with its EBIT delights us like a fluffy puppy does a toddler. But we have to admit that we see that converting it from EBIT to free cash flow has the opposite effect. Given all of this data, it seems to us that SSY Group is taking a pretty sensible approach to debt. While this carries some risk, it can also improve shareholder returns. 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. These risks can be difficult to spot. Every business has them, and we’ve spotted 2 warning signs for the SSY group you should know.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeright now.
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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.