Does China Brilliant Global (HKG:8026) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that China Brilliant Global Limited (HKG:8026) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for China Brilliant Global

How Much Debt Does China Brilliant Global Carry?

The chart below, which you can click on for greater detail, shows that China Brilliant Global had HK$75.6m in debt in September 2021; about the same as the year before. However, it does have HK$100.6m in cash offsetting this, leading to net cash of HK$25.0m.

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$107.2m due within 12 months and no liabilities due beyond that. Offsetting this, it had HK$100.6m in cash and HK$45.8m in receivables that were due within 12 months. So it can boast HK$39.2m 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. 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 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 had a loss before interest and tax, and actually shrunk its revenue by 21%, to HK$51m. That makes us nervous, to say the least.

So How Risky Is China Brilliant Global?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year China Brilliant Global had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of HK$34m and booked a HK$65m accounting loss. But at least it has HK$25.0m on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 3 warning signs for China Brilliant Global you should be aware of, and 1 of them shouldn't be ignored.

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.