Cybernaut International Holdings (HKG:1020) Is Making Moderate Use Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Cybernaut International Holdings Company Limited (HKG:1020) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Cybernaut International Holdings

What Is Cybernaut International Holdings's Debt?

The image below, which you can click on for greater detail, shows that Cybernaut International Holdings had debt of CN¥159.3m at the end of December 2022, a reduction from CN¥242.8m over a year. On the flip side, it has CN¥50.0m in cash leading to net debt of about CN¥109.3m.

How Strong Is Cybernaut International Holdings' Balance Sheet?

The latest balance sheet data shows that Cybernaut International Holdings had liabilities of CN¥39.6m due within a year, and liabilities of CN¥159.6m falling due after that. Offsetting these obligations, it had cash of CN¥50.0m as well as receivables valued at CN¥197.5m due within 12 months. So it can boast CN¥48.3m 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. There's no doubt that we learn most about debt from the balance sheet. But it is Cybernaut International Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Cybernaut International Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥57m, which is a fall of 55%. To be frank that doesn't bode well.

Caveat Emptor

While Cybernaut 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. Indeed, it lost CN¥20m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. And the cherry on top is that its actual free cash flow was CN¥5.5m with statutory profit coming in at CN¥11m. This one is a bit too risky for our liking. 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. Case in point: We've spotted 3 warning signs for Cybernaut International Holdings you should be aware of, and 1 of them is concerning.

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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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.