Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Snack Empire Holdings Limited (HKG:1843) does use debt in its business. But should shareholders be worried about its use of debt?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Snack Empire Holdings
You can click the graphic below for the historical numbers, but it shows that Snack Empire Holdings had S$1.95m of debt in March 2024, down from S$2.08m, one year before. But it also has S$22.1m in cash to offset that, meaning it has S$20.2m net cash.
We can see from the most recent balance sheet that Snack Empire Holdings had liabilities of S$5.37m falling due within a year, and liabilities of S$4.20m due beyond that. On the other hand, it had cash of S$22.1m and S$838.0k worth of receivables due within a year. So it can boast S$13.4m more liquid assets than total liabilities.
This surplus strongly suggests that Snack Empire Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Snack Empire Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Snack Empire Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Snack Empire Holdings had a loss before interest and tax, and actually shrunk its revenue by 4.7%, to S$25m. We would much prefer see growth.
While Snack Empire Holdings lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of S$180k. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. There's no doubt the next few years will be crucial to how the business matures. 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. For example, we've discovered 4 warning signs for Snack Empire Holdings (1 is a bit concerning!) that you should be aware of before investing here.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.