Is China Ting Group Holdings (HKG:3398) Using Debt Sensibly?

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 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 should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for China Ting Group Holdings

What Is China Ting Group Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 China Ting Group Holdings had HK$322.8m of debt, an increase on HK$251.0m, over one year. However, its balance sheet shows it holds HK$638.0m in cash, so it actually has HK$315.2m net cash.

A Look At China Ting Group Holdings' Liabilities

The latest balance sheet data shows that China Ting Group Holdings had liabilities of HK$1.06b due within a year, and liabilities of HK$243.2m falling due after that. Offsetting these obligations, it had cash of HK$638.0m as well as receivables valued at HK$379.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$284.1m.

While this might seem like a lot, it is not so bad since China Ting Group Holdings has a market capitalization of HK$745.4m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is China Ting Group 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 China Ting Group Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 9.2%, to HK$1.8b. 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$264m of cash and made a loss of HK$152m. With only HK$315.2m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for China Ting Group Holdings (1 can't be ignored) 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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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.