Is China Pipe Group (HKG:380) A Risky Investment?

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. As with many other companies China Pipe Group Limited (HKG:380) makes use of 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. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for China Pipe Group

What Is China Pipe Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 China Pipe Group had HK$62.2m of debt, an increase on HK$53.4m, over one year. But it also has HK$326.4m in cash to offset that, meaning it has HK$264.3m net cash.

How Healthy Is China Pipe Group's Balance Sheet?

According to the last reported balance sheet, China Pipe Group had liabilities of HK$160.1m due within 12 months, and liabilities of HK$60.2m due beyond 12 months. Offsetting these obligations, it had cash of HK$326.4m as well as receivables valued at HK$187.7m due within 12 months. So it actually has HK$293.7m more liquid assets than total liabilities.

This surplus strongly suggests that China Pipe Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, China Pipe Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that China Pipe Group grew its EBIT at 14% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is China Pipe Group's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While China Pipe Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, China Pipe Group's free cash flow amounted to 39% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case China Pipe Group has HK$264.3m in net cash and a strong balance sheet. And it also grew its EBIT by 14% over the last year. So is China Pipe Group's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - China Pipe Group has 2 warning signs we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.