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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, China City Infrastructure Group Limited (HKG:2349) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for China City Infrastructure Group

How Much Debt Does China City Infrastructure Group Carry?

The image below, which you can click on for greater detail, shows that China City Infrastructure Group had debt of HK$993.7m at the end of December 2020, a reduction from HK$1.62b over a year. On the flip side, it has HK$27.1m in cash leading to net debt of about HK$966.6m.

How Healthy Is China City Infrastructure Group's Balance Sheet?

We can see from the most recent balance sheet that China City Infrastructure Group had liabilities of HK$277.1m falling due within a year, and liabilities of HK$1.29b due beyond that. Offsetting these obligations, it had cash of HK$27.1m as well as receivables valued at HK$67.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$1.47b.

This deficit casts a shadow over the HK$450.5m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. 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 it is China City Infrastructure Group'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 China City Infrastructure Group had a loss before interest and tax, and actually shrunk its revenue by 27%, to HK$74m. To be frank that doesn't bode well.

Caveat Emptor

While China City Infrastructure Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable HK$95m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of HK$85m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that China City Infrastructure Group is showing 2 warning signs in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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