Is CMMB Vision Holdings (HKG:471) Using Debt In A Risky Way?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies CMMB Vision Holdings Limited (HKG:471) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for CMMB Vision Holdings

What Is CMMB Vision Holdings's Debt?

As you can see below, at the end of December 2020, CMMB Vision Holdings had US$53.4m of debt, up from US$47.8m a year ago. Click the image for more detail. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is CMMB Vision Holdings' Balance Sheet?

The latest balance sheet data shows that CMMB Vision Holdings had liabilities of US$8.58m due within a year, and liabilities of US$53.4m falling due after that. Offsetting this, it had US$447.0k in cash and US$4.07m in receivables that were due within 12 months. So it has liabilities totalling US$57.5m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the US$11.5m 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, CMMB Vision Holdings would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is CMMB Vision 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 CMMB Vision Holdings had a loss before interest and tax, and actually shrunk its revenue by 46%, to US$3.9m. To be frank that doesn't bode well.

Caveat Emptor

While CMMB Vision Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable US$2.6m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost US$128m in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example CMMB Vision Holdings has 4 warning signs (and 1 which can'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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