Stock Analysis

Celestial Asia Securities Holdings (HKG:1049) Has Debt But No Earnings; Should You Worry?

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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.' 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 Celestial Asia Securities Holdings Limited (HKG:1049) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Our analysis indicates that 1049 is potentially overvalued!

What Is Celestial Asia Securities Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Celestial Asia Securities Holdings had HK$209.1m of debt, an increase on HK$200.9m, over one year. However, because it has a cash reserve of HK$142.8m, its net debt is less, at about HK$66.3m.

SEHK:1049 Debt to Equity History December 6th 2022

How Strong Is Celestial Asia Securities Holdings' Balance Sheet?

The latest balance sheet data shows that Celestial Asia Securities Holdings had liabilities of HK$675.4m due within a year, and liabilities of HK$121.3m falling due after that. Offsetting these obligations, it had cash of HK$142.8m as well as receivables valued at HK$141.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$512.6m.

This deficit casts a shadow over the HK$163.1m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Celestial Asia Securities Holdings would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Celestial Asia Securities 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, Celestial Asia Securities Holdings made a loss at the EBIT level, and saw its revenue drop to HK$1.3b, which is a fall of 5.4%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Celestial Asia Securities Holdings produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable HK$38m 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. Nevertheless, we would not bet on it given that it vaporized HK$25m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Celestial Asia Securities Holdings is showing 3 warning signs in our investment analysis , and 1 of those is concerning...

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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