Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Above all, Sun Entertainment Group Limited (HKG: 8082) carries a debt. But should shareholders be concerned about its use of debt?
When Is Debt a Problem?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we look at debt levels, we first consider both liquidity and debt levels.
Check out our latest analysis for Sun Entertainment Group
How much debt does the Sun Entertainment group have?
As you can see below, at the end of June 2021, Sun Entertainment Group was in debt of HK $ 35.0 million, down from zero a year ago. Click on the image for more details. On the other hand, he has HK $ 25.6million in cash, resulting in net debt of around HK $ 9.39million.
How strong is Sun Entertainment Group’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Sun Entertainment Group had a liability of HK $ 35.1 million owed within 12 months and a liability of HK $ 39.2 million owed beyond that. On the other hand, he had HK $ 25.6 million in cash and HK $ 38.8 million in receivables due within a year. Thus, its liabilities exceed the sum of its cash and (short-term) receivables by HK $ 9.89 million.
Considering that Sun Entertainment Group has a market cap of HK $ 337.7 million, it is hard to believe that these liabilities pose a significant threat. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time. 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 profits, it may be worth checking out this chart of its long term profit trend.
In the past year, Sun Entertainment Group has incurred a loss before interest and taxes and has actually reduced its revenue by 43%, to HK $ 47 million. It makes us nervous, to say the least.
Emptor Warning
Not only has Sun Entertainment Group revenue declined over the past twelve months, it has also produced negative earnings before interest and taxes (EBIT). His EBIT loss was HK $ 43 million. When we look at this and recall the liabilities on its balance sheet, versus the cash flow, it seems unwise to us that the company has debt. We therefore believe that its record is a bit strained, but not irreparable. Another reason to be cautious is that HK $ 51 million has been lost in negative free cash flow over the past twelve months. In short, it’s a really risky title. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. To this end, you should inquire about the 3 warning signs we spotted with Sun Entertainment Group (including 2 which do not suit us too much).
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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