Is China CBM Group (HKG:8270) A Risky Investment?

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.' 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. Importantly, China CBM Group Company Limited (HKG:8270) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 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, 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.

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 at June 2020 China CBM Group had debt of CN¥76.4m, up from CN¥71.1m in one year. On the flip side, it has CN¥14.0m in cash leading to net debt of about CN¥62.5m.

How Strong Is China CBM Group's Balance Sheet?

The latest balance sheet data shows that China CBM Group had liabilities of CN¥376.3m due within a year, and liabilities of CN¥12.4m falling due after that. On the other hand, it had cash of CN¥14.0m and CN¥13.5m worth of receivables due within a year. So it has liabilities totalling CN¥361.2m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥30.1m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, China CBM Group would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is China CBM Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year China CBM Group had a loss before interest and tax, and actually shrunk its revenue by 7.1%, to CN¥158m. We would much prefer see growth.

Caveat Emptor

Importantly, China CBM Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CN¥45m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost CN¥81m in the last year. So we think buying this stock is risky. 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. Case in point: We've spotted 2 warning signs for China CBM Group you should be aware of, and 1 of them makes us a bit uncomfortable.

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. 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.
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