We Think C&D International Investment Group (HKG:1908) Can Stay On Top Of Its Debt

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.' 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. We note that C&D International Investment Group Limited (HKG:1908) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for C&D International Investment Group

What Is C&D International Investment Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 C&D International Investment Group had CN¥90.6b of debt, an increase on CN¥85.0b, over one year. However, because it has a cash reserve of CN¥53.3b, its net debt is less, at about CN¥37.2b.

A Look At C&D International Investment Group's Liabilities

We can see from the most recent balance sheet that C&D International Investment Group had liabilities of CN¥229.5b falling due within a year, and liabilities of CN¥84.5b due beyond that. Offsetting this, it had CN¥53.3b in cash and CN¥43.4b in receivables that were due within 12 months. So its liabilities total CN¥217.3b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥33.6b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, C&D International Investment Group would likely require a major re-capitalisation if it had to pay its creditors today.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Strangely C&D International Investment Group has a sky high EBITDA ratio of 5.2, implying high debt, but a strong interest coverage of 74.3. So either it has access to very cheap long term debt or that interest expense is going to grow! It is well worth noting that C&D International Investment Group's EBIT shot up like bamboo after rain, gaining 34% in the last twelve months. That'll make it easier to manage its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if C&D International Investment Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, C&D International Investment Group recorded free cash flow worth a fulsome 85% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Our View

We weren't impressed with C&D International Investment Group's net debt to EBITDA, and its level of total liabilities made us cautious. But its interest cover was significantly redeeming. Looking at all this data makes us feel a little cautious about C&D International Investment Group's debt levels. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for C&D International Investment Group (1 is a bit unpleasant!) that you should be aware of before investing here.

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.