Is CCT Fortis Holdings (HKG:138) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 CCT Fortis Holdings Limited (HKG:138) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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

How Much Debt Does CCT Fortis Holdings Carry?

As you can see below, at the end of June 2021, CCT Fortis Holdings had HK$1.97b of debt, up from HK$1.89b a year ago. Click the image for more detail. However, it does have HK$689.0m in cash offsetting this, leading to net debt of about HK$1.28b.

How Healthy Is CCT Fortis Holdings' Balance Sheet?

We can see from the most recent balance sheet that CCT Fortis Holdings had liabilities of HK$701.0m falling due within a year, and liabilities of HK$1.65b due beyond that. Offsetting these obligations, it had cash of HK$689.0m as well as receivables valued at HK$273.0m due within 12 months. So its liabilities total HK$1.39b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the HK$150.2m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, CCT Fortis Holdings made a loss at the EBIT level, and saw its revenue drop to HK$594m, which is a fall of 9.9%. That's not what we would hope to see.

Caveat Emptor

Importantly, CCT Fortis Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable HK$159m at the EBIT level. 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. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it burned through HK$55m in the last year. So is this a high risk stock? We think so, and we'd avoid it. 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 instance, we've identified 3 warning signs for CCT Fortis Holdings (2 are significant) you should be aware of.

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.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.