Is Cinese International Group Holdings (HKG:1620) Using Too Much Debt?

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, Cinese International Group Holdings Limited (HKG:1620) does carry debt. But is this debt a concern to shareholders?

Our free stock report includes 2 warning signs investors should be aware of before investing in Cinese International Group Holdings. Read for free now.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Cinese International Group Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Cinese International Group Holdings had debt of HK$19.3m, up from HK$13.3m in one year. But it also has HK$31.8m in cash to offset that, meaning it has HK$12.5m net cash.

How Strong Is Cinese International Group Holdings' Balance Sheet?

The latest balance sheet data shows that Cinese International Group Holdings had liabilities of HK$108.4m due within a year, and liabilities of HK$1.86m falling due after that. Offsetting this, it had HK$31.8m in cash and HK$59.0m in receivables that were due within 12 months. So it has liabilities totalling HK$19.5m more than its cash and near-term receivables, combined.

Cinese International Group Holdings has a market capitalization of HK$69.6m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Cinese International Group Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Cinese International Group Holdings 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.

View our latest analysis for Cinese International Group Holdings

Over 12 months, Cinese International Group Holdings made a loss at the EBIT level, and saw its revenue drop to HK$96m, which is a fall of 7.3%. We would much prefer see growth.

So How Risky Is Cinese International Group Holdings?

While Cinese International Group Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$3.1m. 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. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Cinese International Group Holdings you should know about.

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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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.