China CBM Group (HKG:8270) Has A Pretty Healthy Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that China CBM Group Company Limited (HKG:8270) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for China CBM Group

How Much Debt Does China CBM Group Carry?

The chart below, which you can click on for greater detail, shows that China CBM Group had CN¥21.3m in debt in June 2023; about the same as the year before. But it also has CN¥142.9m in cash to offset that, meaning it has CN¥121.5m net cash.

How Healthy Is China CBM Group's Balance Sheet?

The latest balance sheet data shows that China CBM Group had liabilities of CN¥268.5m due within a year, and liabilities of CN¥6.47m falling due after that. Offsetting these obligations, it had cash of CN¥142.9m as well as receivables valued at CN¥25.0m due within 12 months. So its liabilities total CN¥107.1m more than the combination of its cash and short-term receivables.

China CBM Group has a market capitalization of CN¥252.6m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, China CBM Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, China CBM Group made a loss at the EBIT level, last year, but improved that to positive EBIT of CN¥1.1m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since China CBM Group 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. China CBM Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, China CBM Group actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although China CBM Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥121.5m. And it impressed us with free cash flow of CN¥3.7m, being 334% of its EBIT. So we don't have any problem with China CBM Group's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for China CBM Group you should be aware of, and 2 of them can't be ignored.

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.