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.' 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. As with many other companies China Brilliant Global Limited (HKG:8026) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for China Brilliant Global

What Is China Brilliant Global's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 China Brilliant Global had HK$93.1m of debt, an increase on HK$85.8m, over one year. However, it does have HK$45.7m in cash offsetting this, leading to net debt of about HK$47.4m.

How Strong Is China Brilliant Global's Balance Sheet?

According to the last reported balance sheet, China Brilliant Global had liabilities of HK$61.5m due within 12 months, and liabilities of HK$58.2m due beyond 12 months. Offsetting these obligations, it had cash of HK$45.7m as well as receivables valued at HK$82.7m due within 12 months. So it actually has HK$8.67m more liquid assets than total liabilities.

This state of affairs indicates that China Brilliant Global's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the HK$684.9m company is struggling for cash, we still think it's worth monitoring its balance sheet. There's no doubt that we learn most about debt from the balance sheet. But it is China Brilliant Global's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year China Brilliant Global wasn't profitable at an EBIT level, but managed to grow its revenue by 5.0%, to HK$96m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months China Brilliant Global produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at HK$45m. 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. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. So it seems too risky for our taste. 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 instance, we've identified 4 warning signs for China Brilliant Global (3 don't sit too well with us) you should be aware of.

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.