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. 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?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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. 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¥24.0m at the end of December 2021, a reduction from CN¥59.2m over a year. However, it does have CN¥63.9m in cash offsetting this, leading to net cash of CN¥39.9m.

How Healthy Is China CBM Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that China CBM Group had liabilities of CN¥347.7m due within 12 months and liabilities of CN¥5.57m due beyond that. Offsetting these obligations, it had cash of CN¥63.9m as well as receivables valued at CN¥53.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥236.3m.

This deficit casts a shadow over the CN¥94.5m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, China CBM Group would probably need a major re-capitalization if its creditors were to demand repayment. 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¥215m, which is a gain of 20%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is China CBM Group?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months China CBM Group lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥19m and booked a CN¥2.2m accounting loss. But the saving grace is the CN¥39.9m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. Case in point: We've spotted 3 warning signs for China CBM Group you should be aware of, and 1 of them shouldn't be ignored.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.