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

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that China CBM Group Company Limited (HKG:8270) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for China CBM Group

How Much Debt Does China CBM Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 China CBM Group had CN¥29.3m of debt, an increase on CN¥21.3m, over one year. However, it does have CN¥58.1m in cash offsetting this, leading to net cash of CN¥28.7m.

How Healthy Is China CBM Group's Balance Sheet?

The latest balance sheet data shows that China CBM Group had liabilities of CN¥195.2m due within a year, and liabilities of CN¥3.40m falling due after that. Offsetting this, it had CN¥58.1m in cash and CN¥2.79m in receivables that were due within 12 months. So its liabilities total CN¥137.8m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of CN¥154.3m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, China CBM Group also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 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 made a loss at the EBIT level, and saw its revenue drop to CN¥258m, which is a fall of 4.2%. That's not what we would hope to see.

So How Risky Is China CBM Group?

Although China CBM Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥6.1m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. We've identified 3 warning signs with China CBM Group (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.