Is CHTC Fong's International (HKG:641) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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, CHTC Fong's International Company Limited (HKG:641) does carry debt. But should shareholders be worried about its use of debt?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for CHTC Fong's International

How Much Debt Does CHTC Fong's International Carry?

You can click the graphic below for the historical numbers, but it shows that CHTC Fong's International had HK$1.51b of debt in June 2022, down from HK$1.68b, one year before. However, it also had HK$410.9m in cash, and so its net debt is HK$1.10b.

A Look At CHTC Fong's International's Liabilities

Zooming in on the latest balance sheet data, we can see that CHTC Fong's International had liabilities of HK$2.82b due within 12 months and liabilities of HK$115.4m due beyond that. On the other hand, it had cash of HK$410.9m and HK$433.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$2.09b.

This deficit casts a shadow over the HK$440.1m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, CHTC Fong's International would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since CHTC Fong's International 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, CHTC Fong's International reported revenue of HK$2.7b, which is a gain of 11%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months CHTC Fong's International produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping HK$198m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized HK$83m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for CHTC Fong's International (of which 2 are a bit concerning!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.