Is China Saftower International Holding Group (HKG:8623) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that China Saftower International Holding Group Limited (HKG:8623) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for China Saftower International Holding Group

How Much Debt Does China Saftower International Holding Group Carry?

The image below, which you can click on for greater detail, shows that China Saftower International Holding Group had debt of CN¥106.7m at the end of December 2023, a reduction from CN¥129.4m over a year. And it doesn't have much cash, so its net debt is about the same.

How Healthy Is China Saftower International Holding Group's Balance Sheet?

We can see from the most recent balance sheet that China Saftower International Holding Group had liabilities of CN¥263.7m falling due within a year, and liabilities of CN¥24.6m due beyond that. Offsetting these obligations, it had cash of CN¥1.47m as well as receivables valued at CN¥197.3m due within 12 months. So it has liabilities totalling CN¥89.5m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥20.4m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, China Saftower International Holding Group would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since China Saftower International Holding Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year China Saftower International Holding Group had a loss before interest and tax, and actually shrunk its revenue by 68%, to CN¥245m. That makes us nervous, to say the least.

Caveat Emptor

While China Saftower International Holding Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable CN¥49m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost CN¥60m in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. 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. For example - China Saftower International Holding Group has 2 warning signs we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.