Is Chuanglian Holdings (HKG:2371) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Chuanglian Holdings Limited (HKG:2371) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Chuanglian Holdings

What Is Chuanglian Holdings's Net Debt?

As you can see below, at the end of December 2023, Chuanglian Holdings had CN¥22.1m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has CN¥157.3m in cash, leading to a CN¥135.2m net cash position.

A Look At Chuanglian Holdings' Liabilities

According to the last reported balance sheet, Chuanglian Holdings had liabilities of CN¥109.0m due within 12 months, and liabilities of CN¥118.2m due beyond 12 months. On the other hand, it had cash of CN¥157.3m and CN¥76.1m worth of receivables due within a year. So it can boast CN¥6.24m more liquid assets than total liabilities.

This short term liquidity is a sign that Chuanglian Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Chuanglian Holdings has more cash than debt is arguably a good indication that 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 Chuanglian 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, Chuanglian Holdings reported revenue of CN¥511m, which is a gain of 57%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Chuanglian Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Chuanglian Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥1.1m of cash and made a loss of CN¥36m. Given it only has net cash of CN¥135.2m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Chuanglian Holdings may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. Case in point: We've spotted 2 warning signs for Chuanglian Holdings you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com