Here's Why China Best Group Holding (HKG:370) 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, China Best Group Holding Limited (HKG:370) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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?

The image below, which you can click on for greater detail, shows that China Best Group Holding had debt of HK$312.1m at the end of September 2023, a reduction from HK$343.3m over a year. However, it does have HK$176.4m in cash offsetting this, leading to net debt of about HK$135.7m.

A Look At China Best Group Holding's Liabilities

The latest balance sheet data shows that China Best Group Holding had liabilities of HK$933.4m due within a year, and liabilities of HK$7.00m falling due after that. On the other hand, it had cash of HK$176.4m and HK$823.0m worth of receivables due within a year. So it actually has HK$59.0m more liquid assets than total liabilities.

This surplus suggests that China Best Group Holding is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, China Best Group Holding made a loss at the EBIT level, and saw its revenue drop to HK$327m, which is a fall of 50%. To be frank that doesn't bode well.

Caveat Emptor

While China Best Group Holding's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping HK$297m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd be more likely to spend time trying to understand the stock if the company made a profit. So it seems too risky for our taste. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for China Best Group Holding you should be aware of, and 2 of them are a bit 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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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.