Is CNT Group (HKG:701) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that CNT Group Limited (HKG:701) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for CNT Group

What Is CNT Group's Debt?

As you can see below, CNT Group had HK$269.2m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has HK$539.7m in cash, leading to a HK$270.5m net cash position.

How Strong Is CNT Group's Balance Sheet?

According to the last reported balance sheet, CNT Group had liabilities of HK$724.2m due within 12 months, and liabilities of HK$35.1m due beyond 12 months. On the other hand, it had cash of HK$539.7m and HK$452.1m worth of receivables due within a year. So it actually has HK$232.5m more liquid assets than total liabilities.

This surplus suggests that CNT Group is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that CNT Group has more cash than debt is arguably a good indication that it can manage its debt safely. 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 CNT Group 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.

In the last year CNT Group wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to HK$881m. We usually like to see faster growth from unprofitable companies, but each to their own.

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$20m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. For instance, we've identified 2 warning signs for CNT Group that 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.