Is Chong Kin Group Holdings (HKG:1609) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Chong Kin Group Holdings Limited (HKG:1609) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Chong Kin Group Holdings

What Is Chong Kin Group Holdings's Debt?

The image below, which you can click on for greater detail, shows that Chong Kin Group Holdings had debt of HK$169.5m at the end of September 2020, a reduction from HK$346.7m over a year. However, it also had HK$62.1m in cash, and so its net debt is HK$107.4m.

A Look At Chong Kin Group Holdings's Liabilities

Zooming in on the latest balance sheet data, we can see that Chong Kin Group Holdings had liabilities of HK$223.0m due within 12 months and liabilities of HK$4.71m due beyond that. Offsetting these obligations, it had cash of HK$62.1m as well as receivables valued at HK$365.5m due within 12 months. So it actually has HK$199.9m more liquid assets than total liabilities.

This surplus suggests that Chong Kin Group Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. When analysing debt levels, the balance sheet is the obvious place to start. But it is Chong Kin Group Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Chong Kin Group Holdings had a loss before interest and tax, and actually shrunk its revenue by 35%, to HK$331m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Chong Kin Group Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost HK$105m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. This one is a bit too risky for our liking. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Chong Kin Group Holdings (2 are a bit concerning!) that you should be aware of before investing here.

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.

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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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