Does China Automotive Interior Decoration Holdings (HKG:48) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, China Automotive Interior Decoration Holdings Limited (HKG:48) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 China Automotive Interior Decoration Holdings

What Is China Automotive Interior Decoration Holdings's Debt?

As you can see below, China Automotive Interior Decoration Holdings had HK$40.0m of debt at December 2020, down from HK$44.7m a year prior. But on the other hand it also has HK$54.0m in cash, leading to a HK$14.0m net cash position.

How Strong Is China Automotive Interior Decoration Holdings' Balance Sheet?

We can see from the most recent balance sheet that China Automotive Interior Decoration Holdings had liabilities of HK$135.5m falling due within a year, and liabilities of HK$3.73m due beyond that. On the other hand, it had cash of HK$54.0m and HK$135.4m worth of receivables due within a year. So it actually has HK$50.1m more liquid assets than total liabilities.

This surplus liquidity suggests that China Automotive Interior Decoration Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that China Automotive Interior Decoration Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since China Automotive Interior Decoration 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.

In the last year China Automotive Interior Decoration Holdings had a loss before interest and tax, and actually shrunk its revenue by 51%, to HK$142m. That makes us nervous, to say the least.

So How Risky Is China Automotive Interior Decoration Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that China Automotive Interior Decoration Holdings had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of HK$16m and booked a HK$3.9m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of HK$14.0m. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for China Automotive Interior Decoration Holdings (1 is significant!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

When trading China Automotive Interior Decoration Holdings or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.