China Brilliant Global (HKG:8026) Is Using Debt Safely

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.' 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 can see that China Brilliant Global Limited (HKG:8026) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for China Brilliant Global

What Is China Brilliant Global's Net Debt?

As you can see below, at the end of March 2022, China Brilliant Global had HK$85.8m of debt, up from HK$75.1m a year ago. Click the image for more detail. However, its balance sheet shows it holds HK$93.8m in cash, so it actually has HK$8.07m net cash.

How Healthy Is China Brilliant Global's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that China Brilliant Global had liabilities of HK$93.7m due within 12 months and no liabilities due beyond that. Offsetting this, it had HK$93.8m in cash and HK$53.6m in receivables that were due within 12 months. So it can boast HK$53.8m more liquid assets than total liabilities.

This short term liquidity is a sign that China Brilliant Global could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that China Brilliant Global has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since China Brilliant Global 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 Brilliant Global wasn't profitable at an EBIT level, but managed to grow its revenue by 126%, to HK$91m. So there's no doubt that shareholders are cheering for growth

So How Risky Is China Brilliant Global?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that China Brilliant Global had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of HK$50m and booked a HK$38m accounting loss. But at least it has HK$8.07m on the balance sheet to spend on growth, near-term. The good news for shareholders is that China Brilliant Global has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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. For example China Brilliant Global has 3 warning signs (and 1 which is concerning) we think you should know about.

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.