Cosmopolitan International Holdings (HKG:120) Is Making Moderate Use Of 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Cosmopolitan International Holdings Limited (HKG:120) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Cosmopolitan International Holdings

What Is Cosmopolitan International Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that Cosmopolitan International Holdings had HK$1.04b of debt in December 2020, down from HK$2.34b, one year before. However, because it has a cash reserve of HK$346.0m, its net debt is less, at about HK$695.4m.

A Look At Cosmopolitan International Holdings' Liabilities

We can see from the most recent balance sheet that Cosmopolitan International Holdings had liabilities of HK$3.92b falling due within a year, and liabilities of HK$352.8m due beyond that. Offsetting this, it had HK$346.0m in cash and HK$11.2m in receivables that were due within 12 months. So it has liabilities totalling HK$3.92b more than its cash and near-term receivables, combined.

Cosmopolitan International Holdings has a market capitalization of HK$10.1b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Cosmopolitan International Holdings'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 Cosmopolitan International Holdings had a loss before interest and tax, and actually shrunk its revenue by 42%, to HK$70m. That makes us nervous, to say the least.

Caveat Emptor

While Cosmopolitan International Holdings'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$44m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of HK$124m into a profit. So to be blunt we do think it is 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 1 warning sign for Cosmopolitan International Holdings that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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.
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