These 4 metrics indicate that Samson Holding (HKG: 531) is using debt reasonably well

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Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but the fact that you suffer a permanent loss of capital. “. It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies Samson Holding Ltd. (HKG: 531) uses debt. But the most important question is: what risk does this debt create?

What risk does debt entail?

Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. If things really go wrong, lenders can take over the business. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider both liquidity and debt levels.

Check out our latest analysis for Samson Holding

How much debt does Samson Holding have?

As you can see below, at the end of June 2021, Samson Holding had $ 179.7 million in debt, up from $ 170.5 million a year ago. Click on the image for more details. However, he also had $ 151.5 million in cash, so his net debt is $ 28.2 million.

SEHK: 531 History of debt to equity September 3, 2021

How healthy is Samson Holding’s balance sheet?

Zooming in on the latest balance sheet data, we can see that Samson Holding had a liability of US $ 247.3 million due within 12 months and US $ 63.9 million liability beyond. On the other hand, he had $ 151.5 million in cash and $ 107.3 million in less than one year receivables. Its liabilities therefore total $ 52.4 million more than the combination of its cash and short-term receivables.

Samson Holding has a market capitalization of US $ 117.7 million, so it could most likely raise funds to improve its balance sheet, should the need arise. But we absolutely want to keep our eyes open for indications that its debt is too risky.

We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).

Samson Holding’s net debt stands at a very reasonable level of 1.7 times its EBITDA, while its EBIT only covered its interest expense 6.3 times last year. It appears the company incurs significant depreciation and amortization costs, so perhaps its debt load is heavier than it first appears, since EBITDA is arguably a generous measure of profits. Although Samson Holding recorded a loss in EBIT last year, it was also good to see that it generated $ 6.7 million in EBIT in the last twelve months. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in isolation; since Samson Holding will need income to repay this debt. So if you want to know more about its profits, it may be worth checking out this chart of its long term profit trend.

Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. It is therefore worth checking to what extent earnings before interest and taxes (EBIT) are backed by free cash flow. Over the past year, Samson Holding has actually generated more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee costume.

Our point of view

According to our analysis, the conversion of the EBIT into free cash flow of Samson Holding should indicate that it will not have too many problems with its debt. However, our other observations were not so encouraging. For example, it seems like he’s having a bit of trouble managing his total liabilities. When we consider all the elements mentioned above, it seems to us that Samson Holding is managing its debt quite well. That said, the load is heavy enough that we recommend that any shareholder watch it closely. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example, we discovered 4 warning signs for Samson Holding (2 are of concern!) That you should know before investing here.

If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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