Health Check: How Prudently Does CIFI Holdings (Group) (HKG:884) Use Debt?

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. We note that CIFI Holdings (Group) Co. Ltd. (HKG:884) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

Check out our latest analysis for CIFI Holdings (Group)

How Much Debt Does CIFI Holdings (Group) Carry?

You can click the graphic below for the historical numbers, but it shows that CIFI Holdings (Group) had CN¥92.3b of debt in December 2023, down from CN¥108.4b, one year before. On the flip side, it has CN¥12.8b in cash leading to net debt of about CN¥79.5b.

A Look At CIFI Holdings (Group)'s Liabilities

The latest balance sheet data shows that CIFI Holdings (Group) had liabilities of CN¥208.5b due within a year, and liabilities of CN¥28.0b falling due after that. Offsetting this, it had CN¥12.8b in cash and CN¥82.5b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥141.3b.

This deficit casts a shadow over the CN¥4.68b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, CIFI Holdings (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 ultimately the future profitability of the business will decide if CIFI Holdings (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.

Over 12 months, CIFI Holdings (Group) reported revenue of CN¥72b, which is a gain of 51%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, CIFI Holdings (Group) still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CN¥1.9b. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost CN¥9.0b in the last year. So we think buying this stock is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for CIFI Holdings (Group) you should be aware of.

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.