Is C&D Newin Paper & Pulp (HKG:731) A Risky Investment?

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. We can see that C&D Newin Paper & Pulp Corporation Limited (HKG:731) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 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. 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.

See our latest analysis for C&D Newin Paper & Pulp

How Much Debt Does C&D Newin Paper & Pulp Carry?

The image below, which you can click on for greater detail, shows that at June 2024 C&D Newin Paper & Pulp had debt of HK$562.8m, up from HK$469.5m in one year. However, it also had HK$28.1m in cash, and so its net debt is HK$534.7m.

How Healthy Is C&D Newin Paper & Pulp's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that C&D Newin Paper & Pulp had liabilities of HK$501.7m due within 12 months and liabilities of HK$467.5m due beyond that. On the other hand, it had cash of HK$28.1m and HK$39.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$901.2m.

The deficiency here weighs heavily on the HK$202.3m 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, C&D Newin Paper & Pulp 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 you can't view debt in total isolation; since C&D Newin Paper & Pulp 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.

In the last year C&D Newin Paper & Pulp wasn't profitable at an EBIT level, but managed to grow its revenue by 4.4%, to HK$1.4b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, C&D Newin Paper & Pulp had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping HK$38m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through HK$9.4m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for C&D Newin Paper & Pulp (of which 1 can't be ignored!) 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.