Is Champion Technology Holdings (HKG:92) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that Champion Technology Holdings Limited (HKG:92) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 Champion Technology Holdings

What Is Champion Technology Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that Champion Technology Holdings had HK$225.5m of debt in June 2021, down from HK$252.7m, one year before. However, because it has a cash reserve of HK$177.5m, its net debt is less, at about HK$48.0m.

How Strong Is Champion Technology Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Champion Technology Holdings had liabilities of HK$99.9m due within 12 months and liabilities of HK$250.9m due beyond that. On the other hand, it had cash of HK$177.5m and HK$68.0m worth of receivables due within a year. So its liabilities total HK$105.3m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of HK$74.5m, we think shareholders really should watch Champion Technology Holdings's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Champion Technology Holdings 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, Champion Technology Holdings made a loss at the EBIT level, and saw its revenue drop to HK$237m, which is a fall of 42%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Champion Technology Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping HK$15m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of HK$60m. And until that time we think this is a risky stock. 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. For example, we've discovered 1 warning sign for Champion Technology Holdings that you should be aware of before investing here.

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.

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.

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