Cornerstone Technologies Holdings (HKG:8391) Is Carrying A Fair Bit Of Debt

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.' 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, Cornerstone Technologies Holdings Limited (HKG:8391) does carry debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Cornerstone Technologies Holdings

What Is Cornerstone Technologies Holdings's Net Debt?

As you can see below, Cornerstone Technologies Holdings had HK$30.5m of debt at December 2022, down from HK$83.2m a year prior. On the flip side, it has HK$14.9m in cash leading to net debt of about HK$15.5m.

A Look At Cornerstone Technologies Holdings' Liabilities

We can see from the most recent balance sheet that Cornerstone Technologies Holdings had liabilities of HK$80.9m falling due within a year, and liabilities of HK$38.3m due beyond that. On the other hand, it had cash of HK$14.9m and HK$19.1m worth of receivables due within a year. So its liabilities total HK$85.2m more than the combination of its cash and short-term receivables.

Given Cornerstone Technologies Holdings has a market capitalization of HK$568.1m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Cornerstone Technologies Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Cornerstone Technologies Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 54%, to HK$81m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Cornerstone Technologies Holdings managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable HK$169m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled HK$65m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. Be aware that Cornerstone Technologies Holdings is showing 5 warning signs in our investment analysis , and 2 of those are a bit unpleasant...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.