Auditors Are Concerned About China LNG Group (HKG:931)

When China LNG Group Limited (HKG:931) reported its results to March 2021 its auditors, Pannell Kerr Forster could not be sure that it would be able to continue as a going concern in the next year. It is therefore fair to assume that, based on those financials, the company should strengthen its balance sheet in the short term, perhaps by issuing shares.

If the company does have to issue more shares, potential investors will be sure to consider how desperate it is for capital. So shareholders should absolutely be taking a close look at how risky the balance sheet is. The biggest concern we would have is the company's debt, since its lenders might force the company into administration if it cannot repay them.

View our latest analysis for China LNG Group

What Is China LNG Group's Net Debt?

The chart below, which you can click on for greater detail, shows that China LNG Group had HK$514.0m in debt in March 2021; about the same as the year before. However, because it has a cash reserve of HK$131.1m, its net debt is less, at about HK$382.9m.

How Healthy Is China LNG Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that China LNG Group had liabilities of HK$628.3m due within 12 months and liabilities of HK$518.6m due beyond that. Offsetting these obligations, it had cash of HK$131.1m as well as receivables valued at HK$195.7m due within 12 months. So it has liabilities totalling HK$820.0m more than its cash and near-term receivables, combined.

This deficit isn't so bad because China LNG Group is worth HK$1.98b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 China LNG Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year China LNG Group had a loss before interest and tax, and actually shrunk its revenue by 58%, to HK$775m. That makes us nervous, to say the least.

Caveat Emptor

Not only did China LNG Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at HK$92m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled HK$40m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. We prefer to avoid a company after its auditor has expressed any uncertainty about its ability to continue as a going concern. That's because we find it more comfortable to invest in companies that always keep the balance sheet reasonably strong. 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 China LNG Group has 3 warning signs (and 2 which can't be ignored) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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