Is Champion Technology Holdings (HKG:92) Weighed On By Its Debt Load?

Warren Buffett famously said, '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. Importantly, Champion Technology Holdings Limited (HKG:92) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Champion Technology Holdings

What Is Champion Technology Holdings's Debt?

As you can see below, Champion Technology Holdings had HK$246.0m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, it also had HK$193.0m in cash, and so its net debt is HK$53.0m.

How Healthy Is Champion Technology Holdings' Balance Sheet?

The latest balance sheet data shows that Champion Technology Holdings had liabilities of HK$99.2m due within a year, and liabilities of HK$306.5m falling due after that. Offsetting this, it had HK$193.0m in cash and HK$78.2m in receivables that were due within 12 months. So it has liabilities totalling HK$134.6m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$81.4m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Champion Technology Holdings would likely require a major re-capitalisation if it had to pay its creditors today. 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.

In the last year Champion Technology Holdings had a loss before interest and tax, and actually shrunk its revenue by 47%, to HK$288m. 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$33m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of HK$76m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be 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. For example - Champion Technology Holdings has 2 warning signs we think you should be aware of.

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. 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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