Is China Demeter Financial Investments (HKG:8120) Using Debt Sensibly?

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 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. We can see that China Demeter Financial Investments Limited (HKG:8120) does use debt in its business. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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

How Much Debt Does China Demeter Financial Investments Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 China Demeter Financial Investments had HK$20.1m of debt, an increase on HK$10.0m, over one year. But it also has HK$76.4m in cash to offset that, meaning it has HK$56.4m net cash.

A Look At China Demeter Financial Investments' Liabilities

The latest balance sheet data shows that China Demeter Financial Investments had liabilities of HK$128.7m due within a year, and liabilities of HK$7.63m falling due after that. Offsetting this, it had HK$76.4m in cash and HK$101.7m in receivables that were due within 12 months. So it can boast HK$41.9m more liquid assets than total liabilities.

This luscious liquidity implies that China Demeter Financial Investments' balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, China Demeter Financial Investments boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. 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 reported revenue of HK$160m, which is a gain of 3.5%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is China Demeter Financial Investments?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year China Demeter Financial Investments had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through HK$19m of cash and made a loss of HK$37m. While this does make the company a bit risky, it's important to remember it has net cash of HK$56.4m. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Be aware that China Demeter Financial Investments is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.