Does Chinney Alliance Group (HKG:385) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Chinney Alliance Group Limited (HKG:385) does carry debt. But should shareholders be worried about its use of debt?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Chinney Alliance Group

How Much Debt Does Chinney Alliance Group Carry?

The image below, which you can click on for greater detail, shows that at June 2023 Chinney Alliance Group had debt of HK$582.0m, up from HK$528.6m in one year. However, it does have HK$860.8m in cash offsetting this, leading to net cash of HK$278.9m.

A Look At Chinney Alliance Group's Liabilities

The latest balance sheet data shows that Chinney Alliance Group had liabilities of HK$2.78b due within a year, and liabilities of HK$137.1m falling due after that. On the other hand, it had cash of HK$860.8m and HK$2.38b worth of receivables due within a year. So it actually has HK$323.0m more liquid assets than total liabilities.

This surplus liquidity suggests that Chinney Alliance Group's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Chinney Alliance Group boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Chinney Alliance Group will need earnings to service that debt. 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.

Over 12 months, Chinney Alliance Group made a loss at the EBIT level, and saw its revenue drop to HK$5.6b, which is a fall of 16%. That's not what we would hope to see.

So How Risky Is Chinney Alliance Group?

While Chinney Alliance Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$245m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The next few years will be important as the business matures. 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 Chinney Alliance Group (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

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. 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.