Is China City Infrastructure Group (HKG:2349) Weighed On By Its Debt Load?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. 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.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for China City Infrastructure Group

What Is China City Infrastructure Group's Net 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

Zooming in on the latest balance sheet data, we can see that China City Infrastructure Group had liabilities of HK$138.2m due within 12 months and liabilities of HK$462.7m due beyond that. On the other hand, it had cash of HK$14.0m and HK$67.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$519.0m.

This deficit casts a shadow over the HK$215.9m 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. 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 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.

Over 12 months, China City Infrastructure Group made a loss at the EBIT level, and saw its revenue drop to HK$58m, which is a fall of 6.0%. We would much prefer see growth.

Caveat Emptor

Importantly, China City Infrastructure Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost HK$18m 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$22m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. 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 China City Infrastructure Group (1 is a bit unpleasant!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.