Does Changsha Broad Homes Industrial Group (HKG:2163) Have A Healthy Balance Sheet?

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 note that Changsha Broad Homes Industrial Group Co., Ltd. (HKG:2163) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Changsha Broad Homes Industrial Group

What Is Changsha Broad Homes Industrial Group's Debt?

The image below, which you can click on for greater detail, shows that Changsha Broad Homes Industrial Group had debt of CN¥3.37b at the end of June 2024, a reduction from CN¥3.54b over a year. However, it also had CN¥95.0m in cash, and so its net debt is CN¥3.27b.

How Strong Is Changsha Broad Homes Industrial Group's Balance Sheet?

We can see from the most recent balance sheet that Changsha Broad Homes Industrial Group had liabilities of CN¥3.85b falling due within a year, and liabilities of CN¥1.35b due beyond that. Offsetting this, it had CN¥95.0m in cash and CN¥2.34b in receivables that were due within 12 months. So it has liabilities totalling CN¥2.77b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥209.0m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Changsha Broad Homes Industrial Group would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is Changsha Broad Homes Industrial Group'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.

Over 12 months, Changsha Broad Homes Industrial Group made a loss at the EBIT level, and saw its revenue drop to CN¥2.1b, which is a fall of 4.8%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Changsha Broad Homes Industrial Group produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CN¥147m. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. 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 CN¥583m in the last year. So we're not very excited about owning this stock. Its too risky for us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Changsha Broad Homes Industrial Group (at least 2 which are a bit concerning) , and understanding them should be part of your investment process.

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.