Chuang's China Investments (HKG:298) Has Debt But No Earnings; Should You Worry?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that Chuang's China Investments Limited (HKG:298) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Chuang's China Investments

What Is Chuang's China Investments's Net Debt?

As you can see below, Chuang's China Investments had HK$775.9m of debt at September 2023, down from HK$1.42b a year prior. But it also has HK$1.22b in cash to offset that, meaning it has HK$444.7m net cash.

How Strong Is Chuang's China Investments' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Chuang's China Investments had liabilities of HK$861.4m due within 12 months and liabilities of HK$448.5m due beyond that. Offsetting these obligations, it had cash of HK$1.22b as well as receivables valued at HK$48.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$40.5m.

Given Chuang's China Investments has a market capitalization of HK$328.6m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Chuang's China Investments also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Chuang's China Investments's earnings that will influence how the balance sheet holds up in the future. 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 Chuang's China Investments had a loss before interest and tax, and actually shrunk its revenue by 3.0%, to HK$95m. We would much prefer see growth.

So How Risky Is Chuang's China Investments?

While Chuang's China Investments lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$192m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. Be aware that Chuang's China Investments is showing 2 warning signs in our investment analysis , and 1 of those is significant...

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.