China Ting Group Holdings (HKG:3398) Has Debt But No Earnings; Should You Worry?

Simply Wall St
November 22, 2021
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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, China Ting Group Holdings Limited (HKG:3398) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for China Ting Group Holdings

How Much Debt Does China Ting Group Holdings Carry?

As you can see below, China Ting Group Holdings had HK$135.1m of debt at June 2021, down from HK$608.5m a year prior. However, its balance sheet shows it holds HK$820.0m in cash, so it actually has HK$684.8m net cash.

SEHK:3398 Debt to Equity History November 22nd 2021

How Healthy Is China Ting Group Holdings' Balance Sheet?

The latest balance sheet data shows that China Ting Group Holdings had liabilities of HK$929.7m due within a year, and liabilities of HK$158.2m falling due after that. On the other hand, it had cash of HK$820.0m and HK$469.1m worth of receivables due within a year. So it can boast HK$201.1m more liquid assets than total liabilities.

This excess liquidity is a great indication that China Ting Group Holdings' balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that China Ting Group Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since China Ting Group Holdings 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 Ting Group Holdings had a loss before interest and tax, and actually shrunk its revenue by 3.5%, to HK$1.6b. We would much prefer see growth.

So How Risky Is China Ting Group Holdings?

While China Ting Group Holdings lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of HK$39m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. For instance, we've identified 2 warning signs for China Ting Group Holdings that you should be aware of.

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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