Does CCT Fortis Holdings (HKG:138) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that CCT Fortis Holdings Limited (HKG:138) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for CCT Fortis Holdings

What Is CCT Fortis Holdings's Debt?

The chart below, which you can click on for greater detail, shows that CCT Fortis Holdings had HK$1.87b in debt in December 2020; about the same as the year before. On the flip side, it has HK$673.0m in cash leading to net debt of about HK$1.19b.

How Strong Is CCT Fortis Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CCT Fortis Holdings had liabilities of HK$650.0m due within 12 months and liabilities of HK$1.68b due beyond that. Offsetting these obligations, it had cash of HK$673.0m as well as receivables valued at HK$238.0m due within 12 months. So its liabilities total HK$1.42b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$174.6m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, CCT Fortis Holdings would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since CCT Fortis 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.

Over 12 months, CCT Fortis Holdings made a loss at the EBIT level, and saw its revenue drop to HK$505m, which is a fall of 54%. That makes us nervous, to say the least.

Caveat Emptor

While CCT Fortis Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping HK$175m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost HK$686m in the last year. So we think buying this stock is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for CCT Fortis Holdings (of which 2 can't be ignored!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.
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