China LNG Group (HKG:931) Is Making Moderate Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 LNG Group Limited (HKG:931) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

See our latest analysis for China LNG Group

How Much Debt Does China LNG Group Carry?

As you can see below, at the end of March 2023, China LNG Group had HK$591.4m of debt, up from HK$563.1m a year ago. Click the image for more detail. On the flip side, it has HK$50.1m in cash leading to net debt of about HK$541.3m.

How Strong 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$737.3m due within 12 months and liabilities of HK$506.5m due beyond that. On the other hand, it had cash of HK$50.1m and HK$148.1m worth of receivables due within a year. So its liabilities total HK$1.05b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of HK$1.69b, so it does suggest shareholders should keep an eye on China LNG Group's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is China LNG Group's earnings that will influence how the balance sheet holds up in the future. 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 51%, to HK$212m. To be frank that doesn't bode well.

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$147m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of HK$167m into a profit. So we do think this stock is quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for China LNG Group that you should be aware of before investing here.

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.