Here's Why China LNG Group (HKG:931) Can Afford Some Debt

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 note that China LNG Group Limited (HKG:931) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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

What Is China LNG Group's Debt?

As you can see below, China LNG Group had HK$531.9m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it also had HK$35.6m in cash, and so its net debt is HK$496.4m.

A Look At China LNG Group's Liabilities

We can see from the most recent balance sheet that China LNG Group had liabilities of HK$703.0m falling due within a year, and liabilities of HK$513.9m due beyond that. Offsetting these obligations, it had cash of HK$35.6m as well as receivables valued at HK$241.9m due within 12 months. So its liabilities total HK$939.4m more than the combination of its cash and short-term receivables.

China LNG Group has a market capitalization of HK$2.51b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, China LNG Group made a loss at the EBIT level, and saw its revenue drop to HK$1.1b, which is a fall of 44%. 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$184m. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through HK$53m of cash over the last year. So to be blunt we think it is 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, we've discovered 3 warning signs for China LNG Group (2 shouldn't be ignored!) that you should be aware of before investing here.

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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