Stock Analysis

Is CCT Fortis Holdings (HKG:138) Using Too Much Debt?

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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, CCT Fortis Holdings Limited (HKG:138) does carry debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for CCT Fortis Holdings

What Is CCT Fortis Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that CCT Fortis Holdings had debt of HK$1.48b at the end of December 2023, a reduction from HK$1.63b over a year. However, it does have HK$132.0m in cash offsetting this, leading to net debt of about HK$1.35b.

SEHK:138 Debt to Equity History April 16th 2024

How Healthy 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$1.23b due within 12 months and liabilities of HK$876.0m due beyond that. On the other hand, it had cash of HK$132.0m and HK$191.0m worth of receivables due within a year. So it has liabilities totalling HK$1.79b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$298.4m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, CCT Fortis Holdings would likely require a major re-capitalisation if it had to pay its creditors today. 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.

In the last year CCT Fortis Holdings had a loss before interest and tax, and actually shrunk its revenue by 5.8%, to HK$765m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months CCT Fortis Holdings produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping HK$510m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of HK$577m in the last year. So we think this stock is quite risky. We'd prefer to pass. 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. Be aware that CCT Fortis Holdings is showing 3 warning signs in our investment analysis , and 2 of those don't sit too well with us...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Valuation is complex, but we're helping make it simple.

Find out whether CCT Fortis Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.