Health Check: How Prudently Does Celestial Asia Securities Holdings (HKG:1049) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Celestial Asia Securities Holdings Limited (HKG:1049) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Celestial Asia Securities Holdings

How Much Debt Does Celestial Asia Securities Holdings Carry?

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, it also had HK$142.8m in cash, and so its net debt is HK$66.3m.

A Look At Celestial Asia Securities Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Celestial Asia Securities Holdings had liabilities of HK$675.4m due within 12 months and liabilities of HK$121.3m due beyond that. On the other hand, it had cash of HK$142.8m and HK$141.2m worth of receivables due within a year. So it has liabilities totalling HK$512.6m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$99.3m 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Celestial Asia Securities 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.

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%. That's not what we would hope to see.

Caveat Emptor

Importantly, Celestial Asia Securities Holdings had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping HK$38m. 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. But we think that is unlikely, given it is low on liquid assets, and burned through HK$25m in the last year. 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. For example, we've discovered 3 warning signs for Celestial Asia Securities Holdings (1 is concerning!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.