Does CA Cultural Technology Group (HKG:1566) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that CA Cultural Technology Group Limited (HKG:1566) does have debt on its balance sheet. 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. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for CA Cultural Technology Group

What Is CA Cultural Technology Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 CA Cultural Technology Group had HK$612.6m of debt, an increase on HK$539.1m, over one year. However, it does have HK$21.8m in cash offsetting this, leading to net debt of about HK$590.8m.

A Look At CA Cultural Technology Group's Liabilities

We can see from the most recent balance sheet that CA Cultural Technology Group had liabilities of HK$662.3m falling due within a year, and liabilities of HK$330.6m due beyond that. Offsetting this, it had HK$21.8m in cash and HK$263.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$708.0m.

This deficit casts a shadow over the HK$72.1m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, CA Cultural Technology Group would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is CA Cultural Technology Group'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 CA Cultural Technology Group had a loss before interest and tax, and actually shrunk its revenue by 5.3%, to HK$453m. That's not what we would hope to see.

Caveat Emptor

Importantly, CA Cultural Technology Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable HK$358m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost HK$375m in the last year. So we're not very excited about owning this stock. Its too risky for us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 5 warning signs we've spotted with CA Cultural Technology Group (including 2 which make us uncomfortable) .

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.