These 4 Measures Indicate That Sun Hing Printing Holdings (HKG:1975) Is Using Debt Reasonably Well

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.

SEHK:1975 Historical Debt, September 16th 2019
SEHK:1975 Historical Debt, September 16th 2019

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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Sun Hing Printing Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Sun Hing Printing Holdings's free cash flow amounted to 48% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case Sun Hing Printing Holdings has HK$188m in net cash and a strong balance sheet. So is Sun Hing Printing Holdings's debt a risk? It doesn't seem so to us. Given Sun Hing Printing Holdings has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.