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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Hong Kong Shanghai Alliance Holdings Limited (HKG:1001) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Hong Kong Shanghai Alliance Holdings
What Is Hong Kong Shanghai Alliance Holdings's Debt?
As you can see below, Hong Kong Shanghai Alliance Holdings had HK$1.49b of debt at March 2019, down from HK$1.56b a year prior. However, it also had HK$163.5m in cash, and so its net debt is HK$1.33b.
How Strong Is Hong Kong Shanghai Alliance Holdings's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Hong Kong Shanghai Alliance Holdings had liabilities of HK$1.07b due within 12 months and liabilities of HK$812.2m due beyond that. Offsetting these obligations, it had cash of HK$163.5m as well as receivables valued at HK$480.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$1.24b.
The deficiency here weighs heavily on the HK$307.8m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Hong Kong Shanghai Alliance Holdings would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Hong Kong Shanghai Alliance Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.