China Finance Investment Holdings (HKG:875) Is Carrying A Fair Bit 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. Importantly, China Finance Investment Holdings Limited (HKG:875) does carry debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for China Finance Investment Holdings

How Much Debt Does China Finance Investment Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 China Finance Investment Holdings had HK$272.0m of debt, an increase on HK$251.8m, over one year. However, it does have HK$64.6m in cash offsetting this, leading to net debt of about HK$207.4m.

How Strong Is China Finance Investment Holdings' Balance Sheet?

The latest balance sheet data shows that China Finance Investment Holdings had liabilities of HK$485.5m due within a year, and liabilities of HK$49.9m falling due after that. On the other hand, it had cash of HK$64.6m and HK$596.1m worth of receivables due within a year. So it actually has HK$125.3m more liquid assets than total liabilities.

This surplus strongly suggests that China Finance Investment Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. 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 Finance Investment Holdings 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 Finance Investment Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 5.7%, to HK$329m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, China Finance Investment Holdings had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping HK$67m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. This one is a bit too risky for our liking. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with China Finance Investment Holdings (including 2 which make us uncomfortable) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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