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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Sun Hing Printing Holdings Limited (HKG:1975) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Sun Hing Printing Holdings
How Much Debt Does Sun Hing Printing Holdings Carry?
As you can see below, Sun Hing Printing Holdings had HK$3.0k of debt at December 2018, down from HK$3.84m a year prior. However, its balance sheet shows it holds HK$187.9m in cash, so it actually has HK$187.9m net cash.
How Healthy Is Sun Hing Printing Holdings's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Sun Hing Printing Holdings had liabilities of HK$45.3m due within 12 months and liabilities of HK$150.0k due beyond that. Offsetting this, it had HK$187.9m in cash and HK$62.6m in receivables that were due within 12 months. So it can boast HK$205.0m more liquid assets than total liabilities.
This luscious liquidity implies that Sun Hing Printing Holdings's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Simply put, the fact that Sun Hing Printing Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.
It is just as well that Sun Hing Printing Holdings's load is not too heavy, because its EBIT was down 40% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sun Hing Printing 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.