We Think Cosmopolitan International Holdings (HKG:120) Has A Fair Chunk Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Cosmopolitan International Holdings Limited (HKG:120) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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?

As you can see below, Cosmopolitan International Holdings had HK$1.92b of debt at June 2020, down from HK$2.23b a year prior. However, it does have HK$636.6m in cash offsetting this, leading to net debt of about HK$1.28b.

How Healthy Is Cosmopolitan International Holdings's Balance Sheet?

The latest balance sheet data shows that Cosmopolitan International Holdings had liabilities of HK$2.21b due within a year, and liabilities of HK$1.90b falling due after that. On the other hand, it had cash of HK$636.6m and HK$17.1m worth of receivables due within a year. So it has liabilities totalling HK$3.46b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Cosmopolitan International Holdings has a market capitalization of HK$11.3b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Cosmopolitan International Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Cosmopolitan International Holdings made a loss at the EBIT level, and saw its revenue drop to HK$104m, which is a fall of 38%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Cosmopolitan International Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at HK$88m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of HK$192m. So we do think this stock is quite risky. 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. For instance, we've identified 1 warning sign for Cosmopolitan International Holdings that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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