CNT Group (HKG:701) Has A Pretty Healthy Balance Sheet

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 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 can see that CNT Group Limited (HKG:701) does use debt in its business. 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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for CNT Group

What Is CNT Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 CNT Group had HK$269.7m of debt, an increase on HK$216.4m, over one year. But it also has HK$614.2m in cash to offset that, meaning it has HK$344.5m net cash.

How Healthy Is CNT Group's Balance Sheet?

We can see from the most recent balance sheet that CNT Group had liabilities of HK$622.6m falling due within a year, and liabilities of HK$40.4m due beyond that. Offsetting these obligations, it had cash of HK$614.2m as well as receivables valued at HK$392.6m due within 12 months. So it actually has HK$343.7m more liquid assets than total liabilities.

This excess liquidity is a great indication that CNT Group's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, CNT Group boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that CNT Group improved its EBIT from a last year's loss to a positive HK$1.3m. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since CNT 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While CNT Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last year, CNT Group burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case CNT Group has HK$344.5m in net cash and a decent-looking balance sheet. So we are not troubled with CNT Group's debt use. 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. For example CNT Group has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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