Does CITIC Resources Holdings (HKG:1205) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that CITIC Resources Holdings Limited (HKG:1205) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for CITIC Resources Holdings

How Much Debt Does CITIC Resources Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that CITIC Resources Holdings had HK$4.88b of debt in December 2020, down from HK$5.11b, one year before. However, it also had HK$2.31b in cash, and so its net debt is HK$2.57b.

How Strong Is CITIC Resources Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CITIC Resources Holdings had liabilities of HK$1.19b due within 12 months and liabilities of HK$5.32b due beyond that. On the other hand, it had cash of HK$2.31b and HK$412.7m worth of receivables due within a year. So its liabilities total HK$3.78b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's HK$2.83b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But it is CITIC Resources Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year CITIC Resources Holdings had a loss before interest and tax, and actually shrunk its revenue by 17%, to HK$2.9b. We would much prefer see growth.

Caveat Emptor

Not only did CITIC Resources Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at HK$197m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through HK$258m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for CITIC Resources Holdings you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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