In This Article:
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Shougang Concord Century Holdings Limited (HKG:103) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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 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 Shougang Concord Century Holdings
What Is Shougang Concord Century Holdings's Debt?
As you can see below, Shougang Concord Century Holdings had HK$1.03b of debt at June 2019, down from HK$1.13b a year prior. However, it also had HK$131.7m in cash, and so its net debt is HK$893.7m.
A Look At Shougang Concord Century Holdings's Liabilities
The latest balance sheet data shows that Shougang Concord Century Holdings had liabilities of HK$1.67b due within a year, and liabilities of HK$240.3m falling due after that. Offsetting these obligations, it had cash of HK$131.7m as well as receivables valued at HK$1.60b due within 12 months. So it has liabilities totalling HK$186.0m more than its cash and near-term receivables, combined.
This deficit is considerable relative to its market capitalization of HK$282.7m, so it does suggest shareholders should keep an eye on Shougang Concord Century Holdings's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).