Is China Ting Group Holdings (HKG:3398) Using Debt In A Risky Way?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We note that China Ting Group Holdings Limited (HKG:3398) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for China Ting Group Holdings

How Much Debt Does China Ting Group Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 China Ting Group Holdings had HK$234.3m of debt, an increase on HK$135.1m, over one year. However, it does have HK$792.6m in cash offsetting this, leading to net cash of HK$558.3m.

How Healthy Is China Ting Group Holdings' Balance Sheet?

We can see from the most recent balance sheet that China Ting Group Holdings had liabilities of HK$1.10b falling due within a year, and liabilities of HK$147.9m due beyond that. Offsetting these obligations, it had cash of HK$792.6m as well as receivables valued at HK$410.4m due within 12 months. So it has liabilities totalling HK$49.5m more than its cash and near-term receivables, combined.

Of course, China Ting Group Holdings has a market capitalization of HK$671.9m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, China Ting Group Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is China Ting Group 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.

Over 12 months, China Ting Group Holdings reported revenue of HK$1.8b, which is a gain of 10%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is China Ting Group Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that China Ting Group Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through HK$233m of cash and made a loss of HK$308m. With only HK$558.3m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example China Ting Group Holdings has 2 warning signs (and 1 which makes us a bit uncomfortable) we think 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.