Health Check: How Prudently Does China Brilliant Global (HKG:8026) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that China Brilliant Global Limited (HKG:8026) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for China Brilliant Global

What Is China Brilliant Global's Debt?

The image below, which you can click on for greater detail, shows that at March 2021 China Brilliant Global had debt of HK$72.8m, up from HK$983.0k in one year. However, its balance sheet shows it holds HK$111.8m in cash, so it actually has HK$39.0m net cash.

A Look At China Brilliant Global's Liabilities

We can see from the most recent balance sheet that China Brilliant Global had liabilities of HK$9.42m falling due within a year, and liabilities of HK$70.5m due beyond that. On the other hand, it had cash of HK$111.8m and HK$31.3m worth of receivables due within a year. So it actually has HK$63.2m 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is China Brilliant Global's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, China Brilliant Global made a loss at the EBIT level, and saw its revenue drop to HK$59m, which is a fall of 41%. 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 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$37m and booked a HK$40m accounting loss. However, it has net cash of HK$39.0m, so it has a bit of time before it will need more capital. 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. 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. To that end, you should be aware of the 1 warning sign we've spotted with China Brilliant Global .

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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