China CBM Group (HKG:8270) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for China CBM Group

What Is China CBM Group's Net Debt?

The image below, which you can click on for greater detail, shows that China CBM Group had debt of CN¥21.6m at the end of June 2022, a reduction from CN¥59.2m over a year. However, its balance sheet shows it holds CN¥77.6m in cash, so it actually has CN¥56.0m net cash.

A Look At China CBM Group's Liabilities

Zooming in on the latest balance sheet data, we can see that China CBM Group had liabilities of CN¥353.1m due within 12 months and liabilities of CN¥4.46m due beyond that. Offsetting these obligations, it had cash of CN¥77.6m as well as receivables valued at CN¥51.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥228.6m.

The deficiency here weighs heavily on the CN¥98.3m 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 definitely think shareholders need to watch this one closely. After all, China CBM Group would likely require a major re-capitalisation if it had to pay its creditors today. China CBM Group boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. 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.

Over 12 months, China CBM Group reported revenue of CN¥263m, which is a gain of 24%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is China CBM Group?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year China CBM Group had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥21m of cash and made a loss of CN¥4.8m. But the saving grace is the CN¥56.0m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. China CBM Group's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. To that end, you should learn about the 2 warning signs we've spotted with China CBM Group (including 1 which is concerning) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.