Congyu Intelligent Agricultural Holdings (HKG:875) Is Carrying A Fair Bit Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Congyu Intelligent Agricultural Holdings Limited (HKG:875) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Congyu Intelligent Agricultural Holdings

What Is Congyu Intelligent Agricultural Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that Congyu Intelligent Agricultural Holdings had HK$366.3m of debt in June 2024, down from HK$424.6m, one year before. On the flip side, it has HK$11.5m in cash leading to net debt of about HK$354.7m.

How Strong Is Congyu Intelligent Agricultural Holdings' Balance Sheet?

According to the last reported balance sheet, Congyu Intelligent Agricultural Holdings had liabilities of HK$618.9m due within 12 months, and liabilities of HK$49.7m due beyond 12 months. On the other hand, it had cash of HK$11.5m and HK$506.3m worth of receivables due within a year. So it has liabilities totalling HK$150.8m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Congyu Intelligent Agricultural Holdings is worth HK$565.1m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Congyu Intelligent Agricultural Holdings 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.

Over 12 months, Congyu Intelligent Agricultural Holdings made a loss at the EBIT level, and saw its revenue drop to HK$660m, which is a fall of 62%. That makes us nervous, to say the least.

Caveat Emptor

While Congyu Intelligent Agricultural Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping HK$66m. 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. However, it doesn't help that it burned through HK$177m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Congyu Intelligent Agricultural Holdings (1 is significant) 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.

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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.