Is Chinlink International Holdings (HKG:997) 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.' 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. Importantly, Chinlink International Holdings Limited (HKG:997) does carry debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Our analysis indicates that 997 is potentially undervalued!

How Much Debt Does Chinlink International Holdings Carry?

As you can see below, Chinlink International Holdings had HK$1.70b of debt at September 2022, down from HK$2.12b a year prior. And it doesn't have much cash, so its net debt is about the same.

How Healthy Is Chinlink International Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Chinlink International Holdings had liabilities of HK$1.86b due within 12 months and liabilities of HK$1.04b due beyond that. On the other hand, it had cash of HK$21.8m and HK$363.4m worth of receivables due within a year. So it has liabilities totalling HK$2.51b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$40.9m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Chinlink International Holdings 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 it is Chinlink International Holdings'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.

In the last year Chinlink International Holdings had a loss before interest and tax, and actually shrunk its revenue by 22%, to HK$159m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Chinlink International Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable HK$25m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost HK$392m in the last year. So we think buying this stock is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with Chinlink International Holdings .

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.