CMIC Ocean En-Tech Holding (HKG:206) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 CMIC Ocean En-Tech Holding Co., Ltd. (HKG:206) makes use of 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. 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.

View our latest analysis for CMIC Ocean En-Tech Holding

How Much Debt Does CMIC Ocean En-Tech Holding Carry?

As you can see below, CMIC Ocean En-Tech Holding had US$16.7m of debt at June 2019, down from US$22.0m a year prior. However, its balance sheet shows it holds US$51.1m in cash, so it actually has US$34.4m net cash.

A Look At CMIC Ocean En-Tech Holding's Liabilities

The latest balance sheet data shows that CMIC Ocean En-Tech Holding had liabilities of US$240.0m due within a year, and liabilities of US$9.33m falling due after that. Offsetting these obligations, it had cash of US$51.1m as well as receivables valued at US$60.4m due within 12 months. So it has liabilities totalling US$137.8m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the US$84.2m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet." So we'd watch its balance sheet closely, without a doubt At the end of the day, CMIC Ocean En-Tech Holding would probably need a major re-capitalization if its creditors were to demand repayment. Given that CMIC Ocean En-Tech Holding has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. 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 CMIC Ocean En-Tech Holding 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, CMIC Ocean En-Tech Holding reported revenue of US$62m, which is a gain of 2.4%. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is CMIC Ocean En-Tech Holding?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year CMIC Ocean En-Tech Holding had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of US$23m and booked a US$27m accounting loss. But at least it has US$34.4m on the balance sheet to spend on growth, near-term. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how CMIC Ocean En-Tech Holding's profit, revenue, and operating cashflow have changed over the last few years.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.