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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies SMI Culture & Travel Group Holdings Limited (HKG:2366) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for SMI Culture & Travel Group Holdings

What Is SMI Culture & Travel Group Holdings's Debt?

The chart below, which you can click on for greater detail, shows that SMI Culture & Travel Group Holdings had HK$565.0m in debt in December 2018; about the same as the year before. And it doesn't have much cash, so its net debt is about the same.

A Look At SMI Culture & Travel Group Holdings's Liabilities

The latest balance sheet data shows that SMI Culture & Travel Group Holdings had liabilities of HK$980.3m due within a year, and liabilities of HK$12.1m falling due after that. Offsetting this, it had HK$1.72m in cash and HK$286.6m in receivables that were due within 12 months. So it has liabilities totalling HK$704.0m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$159.2m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, SMI Culture & Travel Group Holdings would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since SMI Culture & Travel Group Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.