China Best Group Holding (HKG:370) Is Making Moderate Use Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that China Best Group Holding Limited (HKG:370) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for China Best Group Holding

What Is China Best Group Holding's Net Debt?

You can click the graphic below for the historical numbers, but it shows that China Best Group Holding had HK$329.0m of debt in March 2023, down from HK$363.2m, one year before. However, it also had HK$128.2m in cash, and so its net debt is HK$200.8m.

A Look At China Best Group Holding's Liabilities

According to the last reported balance sheet, China Best Group Holding had liabilities of HK$1.00b due within 12 months, and liabilities of HK$343.0k due beyond 12 months. Offsetting these obligations, it had cash of HK$128.2m as well as receivables valued at HK$780.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$95.4m.

This deficit isn't so bad because China Best Group Holding is worth HK$376.7m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since China Best Group Holding will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year China Best Group Holding had a loss before interest and tax, and actually shrunk its revenue by 41%, to HK$505m. That makes us nervous, to say the least.

Caveat Emptor

Not only did China Best Group Holding's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping HK$288m. 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. Another cause for caution is that is bled HK$23m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. Case in point: We've spotted 2 warning signs for China Best Group Holding you should be aware of, and 1 of them can't be ignored.

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.