China Sinostar Group (HKG:485) Has Debt But No Earnings; Should You Worry?

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.' 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, China Sinostar Group Company Limited (HKG:485) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. 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 Sinostar Group

What Is China Sinostar Group's Net Debt?

The chart below, which you can click on for greater detail, shows that China Sinostar Group had HK$34.4m in debt in September 2021; about the same as the year before. But on the other hand it also has HK$51.6m in cash, leading to a HK$17.2m net cash position.

A Look At China Sinostar Group's Liabilities

The latest balance sheet data shows that China Sinostar Group had liabilities of HK$76.2m due within a year, and liabilities of HK$4.00m falling due after that. Offsetting this, it had HK$51.6m in cash and HK$3.73m in receivables that were due within 12 months. So it has liabilities totalling HK$24.9m more than its cash and near-term receivables, combined.

China Sinostar Group has a market capitalization of HK$45.3m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, China Sinostar Group also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since China Sinostar Group 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.

Over 12 months, China Sinostar Group made a loss at the EBIT level, and saw its revenue drop to HK$37m, which is a fall of 15%. We would much prefer see growth.

So How Risky Is China Sinostar Group?

While China Sinostar Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$11m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. To that end, you should learn about the 3 warning signs we've spotted with China Sinostar Group (including 1 which is 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.