Is China Brilliant Global (HKG:8026) A Risky Investment?

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.' 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 should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for China Brilliant Global

How Much Debt Does China Brilliant Global Carry?

As you can see below, China Brilliant Global had HK$80.8m of debt at September 2022, down from HK$85.7m a year prior. However, it does have HK$76.9m in cash offsetting this, leading to net debt of about HK$3.92m.

A Look At China Brilliant Global's Liabilities

According to the last reported balance sheet, China Brilliant Global had liabilities of HK$51.3m due within 12 months, and liabilities of HK$53.1m due beyond 12 months. Offsetting these obligations, it had cash of HK$76.9m as well as receivables valued at HK$65.2m due within 12 months. So it actually has HK$37.7m more liquid assets than total liabilities.

This surplus suggests that China Brilliant Global has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Carrying virtually no net debt, China Brilliant Global has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since China Brilliant Global will need earnings to service that debt. 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.

Over 12 months, China Brilliant Global reported revenue of HK$104m, which is a gain of 103%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

Despite the top line growth, China Brilliant Global still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at HK$44m. 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 want to see some positive free cashflow before spending much time on trying to understand the stock. Nonetheless, the revenue growth is clearly impressive and that would make it easier to raise capital if need be. So it's risky, but with some potential. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for China Brilliant Global (2 can't be ignored!) that you should be aware of before investing here.

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.