Is Changsha Broad Homes Industrial Group (HKG:2163) Using Too Much Debt?

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. We can see that Changsha Broad Homes Industrial Group Co., Ltd. (HKG:2163) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Changsha Broad Homes Industrial Group

How Much Debt Does Changsha Broad Homes Industrial Group Carry?

The image below, which you can click on for greater detail, shows that at June 2023 Changsha Broad Homes Industrial Group had debt of CN¥3.54b, up from CN¥3.18b in one year. However, it does have CN¥208.4m in cash offsetting this, leading to net debt of about CN¥3.33b.

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

The latest balance sheet data shows that Changsha Broad Homes Industrial Group had liabilities of CN¥4.95b due within a year, and liabilities of CN¥838.2m falling due after 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 its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.99b.

The deficiency here weighs heavily on the CN¥1.32b 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'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. There's no doubt that we learn most about debt from the balance sheet. 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%. We would much prefer see growth.

Caveat Emptor

Not only did Changsha Broad Homes Industrial Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CN¥223m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of CN¥583m didn't encourage us either; we'd like to see a profit. 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Changsha Broad Homes Industrial Group that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.