Is China Sinostar Group (HKG:485) A Risky Investment?

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.' 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. As with many other companies China Sinostar Group Company Limited (HKG:485) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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?

You can click the graphic below for the historical numbers, but it shows that China Sinostar Group had HK$30.0m of debt in March 2023, down from HK$51.7m, one year before. However, because it has a cash reserve of HK$5.67m, its net debt is less, at about HK$24.3m.

How Strong Is China Sinostar Group's Balance Sheet?

According to the balance sheet data, China Sinostar Group had liabilities of HK$75.5m due within 12 months, but no longer term liabilities. Offsetting these obligations, it had cash of HK$5.67m as well as receivables valued at HK$15.2m due within 12 months. So its liabilities total HK$54.6m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$23.4m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, China Sinostar Group would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

In the last year China Sinostar Group had a loss before interest and tax, and actually shrunk its revenue by 39%, to HK$24m. To be frank that doesn't bode well.

Caveat Emptor

While China Sinostar Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping HK$31m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of HK$51m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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. Be aware that China Sinostar Group is showing 3 warning signs in our investment analysis , and 2 of those are a bit unpleasant...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.