Health Check: How Prudently Does China Putian Food Holding (HKG:1699) Use Debt?

By
Simply Wall St
Published
September 27, 2021
SEHK:1699
Source: Shutterstock

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that China Putian Food Holding Limited (HKG:1699) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 China Putian Food Holding

What Is China Putian Food Holding's Net Debt?

The image below, which you can click on for greater detail, shows that China Putian Food Holding had debt of CN¥347.6m at the end of June 2021, a reduction from CN¥392.5m over a year. Net debt is about the same, since the it doesn't have much cash.

debt-equity-history-analysis
SEHK:1699 Debt to Equity History September 27th 2021

How Healthy Is China Putian Food Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that China Putian Food Holding had liabilities of CN¥449.9m due within 12 months and liabilities of CN¥28.4m due beyond that. Offsetting these obligations, it had cash of CN¥6.42m as well as receivables valued at CN¥168.1m due within 12 months. So it has liabilities totalling CN¥303.7m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of CN¥252.6m, we think shareholders really should watch China Putian Food Holding'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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since China Putian Food Holding 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 China Putian Food Holding wasn't profitable at an EBIT level, but managed to grow its revenue by 2.8%, to CN¥639m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, China Putian Food Holding had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CN¥29m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident 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 CN¥56m. 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 instance, we've identified 4 warning signs for China Putian Food Holding (1 is a bit concerning) you should be aware of.

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.

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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Simply Wall St

Simply Wall St is focused on providing unbiased, high-quality research coverage on every listed company in the world. Our research team consists of data scientists and multiple equity analysts with over two decades worth of financial markets experience between them.