Health Check: How Prudently Does Come Sure Group (Holdings) (HKG:794) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Come Sure Group (Holdings) Limited (HKG:794) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Come Sure Group (Holdings)

What Is Come Sure Group (Holdings)'s Net Debt?

The image below, which you can click on for greater detail, shows that Come Sure Group (Holdings) had debt of HK$203.9m at the end of September 2021, a reduction from HK$307.4m over a year. However, because it has a cash reserve of HK$97.9m, its net debt is less, at about HK$105.9m.

How Healthy Is Come Sure Group (Holdings)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Come Sure Group (Holdings) had liabilities of HK$440.2m due within 12 months and liabilities of HK$245.9m due beyond that. On the other hand, it had cash of HK$97.9m and HK$359.1m worth of receivables due within a year. So its liabilities total HK$229.1m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's HK$166.8m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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 Come Sure Group (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.

In the last year Come Sure Group (Holdings) wasn't profitable at an EBIT level, but managed to grow its revenue by 26%, to HK$1.3b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Come Sure Group (Holdings) still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable HK$77m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through HK$48m in negative free cash flow over the last year. So suffice it to say we consider the stock to be 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 1 of those is a bit concerning...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.