Is Century Legend (Holdings) (HKG:79) Using Debt In A Risky Way?

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.' 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. Importantly, Century Legend (Holdings) Limited (HKG:79) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

See our latest analysis for Century Legend (Holdings)

What Is Century Legend (Holdings)'s Net Debt?

As you can see below, Century Legend (Holdings) had HK$221.9m of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has HK$61.8m in cash leading to net debt of about HK$160.1m.

A Look At Century Legend (Holdings)'s Liabilities

According to the last reported balance sheet, Century Legend (Holdings) had liabilities of HK$228.0m due within 12 months, and liabilities of HK$19.3m due beyond 12 months. On the other hand, it had cash of HK$61.8m and HK$11.0m worth of receivables due within a year. So it has liabilities totalling HK$174.5m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$32.3m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Century Legend (Holdings) would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. 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) wasn't profitable at an EBIT level, but managed to grow its revenue by 29%, to HK$45m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Century Legend (Holdings)'s revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping HK$5.1m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through HK$16m in the last year. 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. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Century Legend (Holdings) (2 are a bit unpleasant!) that you should be aware of before investing here.

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.