Here's Why Cybernaut International Holdings (HKG:1020) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Cybernaut International Holdings Company Limited (HKG:1020) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Cybernaut International Holdings

What Is Cybernaut International Holdings's Debt?

As you can see below, Cybernaut International Holdings had CN¥322.5m of debt at June 2021, down from CN¥396.4m a year prior. However, it does have CN¥35.6m in cash offsetting this, leading to net debt of about CN¥286.9m.

A Look At Cybernaut International Holdings' Liabilities

The latest balance sheet data shows that Cybernaut International Holdings had liabilities of CN¥61.7m due within a year, and liabilities of CN¥324.5m falling due after that. Offsetting these obligations, it had cash of CN¥35.6m as well as receivables valued at CN¥262.5m due within 12 months. So its liabilities total CN¥88.0m more than the combination of its cash and short-term receivables.

Since publicly traded Cybernaut International Holdings shares are worth a total of CN¥451.3m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But it is Cybernaut 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 Cybernaut International Holdings had a loss before interest and tax, and actually shrunk its revenue by 27%, to CN¥220m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Cybernaut International Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥22m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥65m of cash over the last year. So suffice it to say we consider the stock very 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Cybernaut International Holdings (of which 1 is significant!) you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.