Come Sure Group (Holdings) (HKG:794) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Come Sure Group (Holdings) Limited (HKG:794) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Come Sure Group (Holdings)

How Much Debt Does Come Sure Group (Holdings) Carry?

You can click the graphic below for the historical numbers, but it shows that Come Sure Group (Holdings) had HK$163.7m of debt in September 2023, down from HK$198.3m, one year before. However, it also had HK$49.1m in cash, and so its net debt is HK$114.6m.

A Look At Come Sure Group (Holdings)'s Liabilities

Zooming in on the latest balance sheet data, we can see that Come Sure Group (Holdings) had liabilities of HK$360.6m due within 12 months and liabilities of HK$194.9m due beyond that. Offsetting these obligations, it had cash of HK$49.1m as well as receivables valued at HK$286.9m due within 12 months. So its liabilities total HK$219.6m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the HK$62.9m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Come Sure Group (Holdings) would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Come Sure Group (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 Come Sure Group (Holdings) had a loss before interest and tax, and actually shrunk its revenue by 32%, to HK$696m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Come Sure Group (Holdings)'s revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable HK$32m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of HK$68m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. 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. Be aware that Come Sure Group (Holdings) is showing 3 warning signs in our investment analysis , and 2 of those are a bit concerning...

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.