Does China Finance Investment Holdings (HKG:875) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, China Finance Investment Holdings Limited (HKG:875) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for China Finance Investment Holdings

What Is China Finance Investment Holdings's Debt?

The image below, which you can click on for greater detail, shows that at June 2021 China Finance Investment Holdings had debt of HK$255.8m, up from HK$176.1m in one year. But it also has HK$257.7m in cash to offset that, meaning it has HK$1.95m net cash.

How Healthy Is China Finance Investment Holdings' Balance Sheet?

We can see from the most recent balance sheet that China Finance Investment Holdings had liabilities of HK$711.7m falling due within a year, and liabilities of HK$54.2m due beyond that. Offsetting this, it had HK$257.7m in cash and HK$701.4m in receivables that were due within 12 months. So it can boast HK$193.2m more liquid assets than total liabilities.

This excess liquidity suggests that China Finance Investment Holdings is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, China Finance Investment Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is China Finance Investment Holdings'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 Finance Investment Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 150%, to HK$527m. So there's no doubt that shareholders are cheering for growth

So How Risky Is China Finance Investment Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year China Finance Investment Holdings had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of HK$112m and booked a HK$55m accounting loss. Given it only has net cash of HK$1.95m, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, China Finance Investment Holdings's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for China Finance Investment Holdings you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.
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