Does CNT Group (HKG:701) Have A 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies CNT Group Limited (HKG:701) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for CNT Group

What Is CNT Group's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2020 CNT Group had debt of HK$226.3m, up from HK$215.9m in one year. But on the other hand it also has HK$408.8m in cash, leading to a HK$182.5m net cash position.

A Look At CNT Group's Liabilities

We can see from the most recent balance sheet that CNT Group had liabilities of HK$466.0m falling due within a year, and liabilities of HK$27.4m due beyond that. Offsetting this, it had HK$408.8m in cash and HK$322.2m in receivables that were due within 12 months. So it actually has HK$237.6m more liquid assets than total liabilities.

This luscious liquidity implies that CNT Group's balance sheet is sturdy like a giant sequoia tree. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Simply put, the fact that CNT Group has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is CNT Group's earnings that will influence how the balance sheet holds up in the future. 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, CNT Group made a loss at the EBIT level, and saw its revenue drop to HK$737m, which is a fall of 18%. We would much prefer see growth.

So How Risky Is CNT Group?

While CNT Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$40m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. Take risks, for example - CNT Group has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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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