Is Changsha Broad Homes Industrial Group (HKG:2163) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Changsha Broad Homes Industrial Group Co., Ltd. (HKG:2163) does have debt on its balance sheet. 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. 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 Changsha Broad Homes Industrial Group

How Much Debt Does Changsha Broad Homes Industrial Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Changsha Broad Homes Industrial Group had CN¥3.54b of debt, an increase on CN¥3.18b, over one year. However, it does have CN¥208.4m in cash offsetting this, leading to net debt of about CN¥3.33b.

How Healthy 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¥4.95b falling due within a year, and liabilities of CN¥838.2m due beyond that. Offsetting these obligations, it had cash of CN¥208.4m as well as receivables valued at CN¥2.59b due within 12 months. So it has liabilities totalling CN¥2.99b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CN¥1.20b 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. After all, Changsha Broad Homes Industrial Group would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Changsha Broad Homes Industrial Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Changsha Broad Homes Industrial Group made a loss at the EBIT level, and saw its revenue drop to CN¥2.2b, which is a fall of 17%. That's not what we would hope to see.

Caveat Emptor

While Changsha Broad Homes Industrial Group'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 CN¥223m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of CN¥583m. In the meantime, we consider the stock to be 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. For example - Changsha Broad Homes Industrial Group has 1 warning sign we think 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.