Snack Empire Holdings (HKG:1843) could easily take on more debt
David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Like many other companies Snack Empire Holdings Limited (HKG:1843) uses debt. But the real question is whether this debt makes the business risky.
What risk does debt carry?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. If things go really bad, lenders can take over the business. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.
Check out our latest analysis for Snack Empire Holdings
How much debt does Snack Empire Holdings have?
You can click on the chart below for historical numbers, but it shows Snack Empire Holdings had S$2.21 million in debt in March 2022, up from S$2.34 million a year before. But he also has S$28.4 million in cash to offset that, meaning he has a net cash of S$26.2 million.
How healthy is Snack Empire Holdings’ balance sheet?
Zooming in on the latest balance sheet data, we can see that Snack Empire Holdings had liabilities of S$4.73 million due within 12 months and liabilities of S$3.51 million due beyond. In compensation for these obligations, it had liquid assets of S$28.4 million as well as receivables valued at S$425.0 k maturing within 12 months. So he actually has S$20.6 million After liquid assets than total liabilities.
This surplus strongly suggests that Snack Empire Holdings has a rock-solid balance sheet (and debt is no problem). From this perspective, lenders should feel as secure as the beloved of a black belt karate master. Simply put, the fact that Snack Empire Holdings has more cash than debt is arguably a good indication that it can safely manage its debt.
Even better, Snack Empire Holdings increased its EBIT by 185% last year, which is an impressive improvement. If sustained, this growth will make debt even more manageable in years to come. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in total isolation; since Snack Empire Holdings will need revenue to repay this debt. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.
Finally, a business needs free cash flow to pay off its debts; book profits are not enough. Snack Empire Holdings may have net cash on the balance sheet, but it’s always interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its needs and its ability to manage debt. Fortunately for all shareholders, Snack Empire Holdings has actually produced more free cash flow than EBIT for the past three years. This kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.
While it’s always a good idea to investigate a company’s debt, in this case Snack Empire Holdings has $26.2 million in net cash and a decent balance sheet. The icing on the cake was that he converted 183% of that EBIT into free cash flow, bringing in S$4.9 million. Ultimately, we’re not concerned about Snack Empire Holdings’ debt. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. We have identified 4 warning signs with Snack Empire Holdings (at least 1, which is a little worrying), and understanding them should be part of your investment process.
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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