How Risky Is Super Group Ltd As An Investment?

Risk is perhaps one of the most misunderstood things about investing. Many investors use a stock’s price movement – its volatility, in other words – to measure its risk. But those who do so may be missing a point.

Billionaire investor Warren Buffett once said “If a business does well, the stock eventually follows.” This speaks to the importance of looking at a stock’s business fundamentals instead of its price as a way to measure its risk.

With this in mind, just how risky is instant coffee manufacturer Super Group Ltd (SGX: S10) as an investment? They are certainly not the only things that matter, but the following are two important ways to measure Super Group’s risk:

1. Balance sheet risk

Debt can make a company fragile and thus hurt its investors. When a company that has been borrowing wantonly starts having trouble servicing or repaying its loans, its investors may have to face the music in the form of dilution, an elimination of dividends, involuntary sale of assets, or in the worst-case scenario, bankruptcy.

A strong balance sheet – one that is flush with cash and with little debt – is the opposite. It gives a company a better ability to survive tough economic climates unscathed. It can even allow a company to go on the offensive during downturns and gain competitive advantages over financially weaker competitors that have to batten down the hatches to ride out storms.

When it comes to Super Group’s balance sheet, the picture looks good. The company ended 2015 with S$124 million in cash on hand and just S$28 million in total debt.

2. Customer concentration risk

A company that depends on only a handful of customers for business can get into really deep trouble if one or a few of them collapse or simply decide to walk away.

In Super Group’s case, there may be some cause for worry. Super Group’s 2014 annual report stated that three customers had collectively accounted for S$205 million in revenue that year. For perspective, Super Group had brought in S$539.5 million in total revenue in 2014. So, the company had depended on just three customers for nearly 40% of its business back then.

A Fool’s take

Given what we’ve seen, I think Super Group has a low level of balance sheet risk but high customer concentration risk. From this, it’s hard to gauge just how risky Super Group really is as an investment since there are other factors at play. But, if you are looking at Super Group, getting a sense of the company’s balance sheet risk and customer concentration risk can still be very useful in your overall assessment of the company.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Super Group.