Is CHYY Development Group (HKG:8128) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies CHYY Development Group Limited (HKG:8128) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for CHYY Development Group

How Much Debt Does CHYY Development Group Carry?

As you can see below, at the end of June 2023, CHYY Development Group had HK$73.2m of debt, up from none a year ago. Click the image for more detail. However, it does have HK$335.7m in cash offsetting this, leading to net cash of HK$262.5m.

How Strong Is CHYY Development Group's Balance Sheet?

We can see from the most recent balance sheet that CHYY Development Group had liabilities of HK$815.3m falling due within a year, and liabilities of HK$123.2m due beyond that. On the other hand, it had cash of HK$335.7m and HK$37.6m worth of receivables due within a year. So its liabilities total HK$565.2m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$280.7m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, CHYY Development Group would likely require a major re-capitalisation if it had to pay its creditors today. CHYY Development Group boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. 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 CHYY Development 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.

In the last year CHYY Development Group wasn't profitable at an EBIT level, but managed to grow its revenue by 2.0%, to HK$111m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is CHYY Development Group?

While CHYY Development Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$25m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. The balance sheet is clearly the area to focus on when you are analysing debt. 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 2 warning signs for CHYY Development Group (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.