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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Cybernaut International Holdings Company Limited (HKG:1020) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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 Net Debt?

As you can see below, Cybernaut International Holdings had CN¥242.8m of debt at December 2021, down from CN¥338.1m a year prior. However, because it has a cash reserve of CN¥44.6m, its net debt is less, at about CN¥198.2m.

How Healthy Is Cybernaut International Holdings' Balance Sheet?

According to the last reported balance sheet, Cybernaut International Holdings had liabilities of CN¥52.2m due within 12 months, and liabilities of CN¥243.7m due beyond 12 months. Offsetting this, it had CN¥44.6m in cash and CN¥220.7m in receivables that were due within 12 months. So it has liabilities totalling CN¥30.6m more than its cash and near-term receivables, combined.

Of course, Cybernaut International Holdings has a market capitalization of CN¥510.3m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year Cybernaut International Holdings had a loss before interest and tax, and actually shrunk its revenue by 56%, to CN¥126m. That makes us nervous, to say the least.

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¥25m 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. For example, we would not want to see a repeat of last year's loss of CN¥258m. So to be blunt we do think it is 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. We've identified 2 warning signs with Cybernaut International Holdings (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

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.

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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.