Cybernaut International Holdings (HKG:1020) Has A Somewhat Strained Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Cybernaut International Holdings Company Limited (HKG:1020) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Cybernaut International Holdings

How Much Debt Does Cybernaut International Holdings Carry?

The image below, which you can click on for greater detail, shows that at December 2023 Cybernaut International Holdings had debt of CN¥201.6m, up from CN¥159.3m in one year. On the flip side, it has CN¥45.1m in cash leading to net debt of about CN¥156.5m.

A Look At Cybernaut International Holdings' Liabilities

According to the last reported balance sheet, Cybernaut International Holdings had liabilities of CN¥87.0m due within 12 months, and liabilities of CN¥194.8m due beyond 12 months. On the other hand, it had cash of CN¥45.1m and CN¥283.5m worth of receivables due within a year. So it actually has CN¥46.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Cybernaut International Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Weak interest cover of 0.40 times and a disturbingly high net debt to EBITDA ratio of 11.5 hit our confidence in Cybernaut International Holdings like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. However, the silver lining was that Cybernaut International Holdings achieved a positive EBIT of CN¥12m in the last twelve months, an improvement on the prior year's loss. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Cybernaut International Holdings will need earnings to service that debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the last year, Cybernaut International Holdings recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Our View

While Cybernaut International Holdings's net debt to EBITDA makes us cautious about it, its track record of covering its interest expense with its EBIT is no better. But its not so bad at staying on top of its total liabilities. When we consider all the factors discussed, it seems to us that Cybernaut International Holdings is taking some risks with its use of debt. So while that leverage does boost returns on equity, we wouldn't really want to see it increase from here. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Cybernaut International Holdings you should know about.

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.