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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We can see that China Ting Group Holdings Limited (HKG:3398) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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

How Much Debt Does China Ting Group Holdings Carry?

As you can see below, China Ting Group Holdings had HK$270.1m of debt at December 2020, down from HK$424.9m a year prior. But on the other hand it also has HK$741.6m in cash, leading to a HK$471.5m net cash position.

A Look At China Ting Group Holdings' Liabilities

According to the last reported balance sheet, China Ting Group Holdings had liabilities of HK$1.01b due within 12 months, and liabilities of HK$131.4m due beyond 12 months. On the other hand, it had cash of HK$741.6m and HK$780.2m worth of receivables due within a year. So it can boast HK$382.2m more liquid assets than total liabilities.

This surplus liquidity suggests that China Ting Group Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, China Ting Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, China Ting Group Holdings made a loss at the EBIT level, and saw its revenue drop to HK$1.5b, which is a fall of 19%. That's not what we would hope to see.

So How Risky Is China Ting Group Holdings?

Although China Ting Group Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of HK$146m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. The next few years will be important as the business matures. 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 example, we've discovered 2 warning signs for China Ting Group Holdings that you should be aware of before investing here.

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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