China City Infrastructure Group (HKG:2349) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies China City Infrastructure Group Limited (HKG:2349) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

View our latest analysis for China City Infrastructure Group

What Is China City Infrastructure Group's Debt?

The image below, which you can click on for greater detail, shows that China City Infrastructure Group had debt of HK$371.7m at the end of June 2023, a reduction from HK$823.6m over a year. However, because it has a cash reserve of HK$14.0m, its net debt is less, at about HK$357.6m.

A Look At China City Infrastructure Group's Liabilities

The latest balance sheet data shows that China City Infrastructure Group had liabilities of HK$138.2m due within a year, and liabilities of HK$462.7m falling due after that. Offsetting this, it had HK$14.0m in cash and HK$67.9m in receivables that were due within 12 months. So its liabilities total HK$519.0m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$334.7m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, China City Infrastructure Group would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since China City Infrastructure 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 China City Infrastructure Group had a loss before interest and tax, and actually shrunk its revenue by 20%, to HK$58m. That makes us nervous, to say the least.

Caveat Emptor

While China City Infrastructure Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at HK$18m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of HK$14m over the last twelve months. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for China City Infrastructure Group (2 are a bit concerning) you should be aware of.

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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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.