David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Sino Hotels (Holdings) Limited (HKG:1221) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Sino Hotels (Holdings)

How Much Debt Does Sino Hotels (Holdings) Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2018 Sino Hotels (Holdings) had HK$1.78m of debt, an increase on HK$1.53m, over one year. But on the other hand it also has HK$1.09b in cash, leading to a HK$1.09b net cash position.

How Strong Is Sino Hotels (Holdings)'s Balance Sheet?

The latest balance sheet data shows that Sino Hotels (Holdings) had liabilities of HK$57.9m due within a year, and liabilities of HK$3.81m falling due after that. Offsetting this, it had HK$1.09b in cash and HK$68.0m in receivables that were due within 12 months. So it can boast HK$1.10b more liquid assets than total liabilities.

This surplus liquidity suggests that Sino Hotels (Holdings)'s balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, it seems its balance sheet is as strong as a black-belt karate master. Simply put, the fact that Sino Hotels (Holdings) has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Sino Hotels (Holdings)'s EBIT dived 11%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But it is Sino Hotels (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.