China Demeter Financial Investments (HKG:8120) Has Debt But No Earnings; Should You Worry?

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.' 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. As with many other companies China Demeter Financial Investments Limited (HKG:8120) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for China Demeter Financial Investments

What Is China Demeter Financial Investments's Net Debt?

As you can see below, China Demeter Financial Investments had HK$20.1m of debt, at December 2022, which is about the same as the year before. You can click the chart for greater detail. But it also has HK$76.1m in cash to offset that, meaning it has HK$56.0m net cash.

How Healthy Is China Demeter Financial Investments' Balance Sheet?

We can see from the most recent balance sheet that China Demeter Financial Investments had liabilities of HK$105.8m falling due within a year, and liabilities of HK$13.2m due beyond that. Offsetting this, it had HK$76.1m in cash and HK$15.5m in receivables that were due within 12 months. So it has liabilities totalling HK$27.5m more than its cash and near-term receivables, combined.

China Demeter Financial Investments has a market capitalization of HK$92.6m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, China Demeter Financial Investments 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 China Demeter Financial Investments 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.

Over 12 months, China Demeter Financial Investments made a loss at the EBIT level, and saw its revenue drop to HK$142m, which is a fall of 14%. We would much prefer see growth.

So How Risky Is China Demeter Financial Investments?

Although China Demeter Financial Investments had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of HK$13m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. For example, we've discovered 2 warning signs for China Demeter Financial Investments that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.