Does Century Legend (Holdings) (HKG:79) Have A Healthy Balance Sheet?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Century Legend (Holdings) Limited (HKG:79) does carry 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. 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.

View our latest analysis for Century Legend (Holdings)

What Is Century Legend (Holdings)'s Debt?

As you can see below, Century Legend (Holdings) had HK$215.5m of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has HK$80.0m in cash leading to net debt of about HK$135.5m.

A Look At Century Legend (Holdings)'s Liabilities

We can see from the most recent balance sheet that Century Legend (Holdings) had liabilities of HK$219.7m falling due within a year, and liabilities of HK$14.6m due beyond that. On the other hand, it had cash of HK$80.0m and HK$6.17m worth of receivables due within a year. So it has liabilities totalling HK$148.2m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$38.2m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Century Legend (Holdings) 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 Century Legend (Holdings)'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 Century Legend (Holdings) had a loss before interest and tax, and actually shrunk its revenue by 7.4%, to HK$35m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Century Legend (Holdings) produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable HK$19m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized HK$3.0m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. Case in point: We've spotted 4 warning signs for Century Legend (Holdings) you should be aware of, and 2 of them are potentially serious.

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.