Is Capinfo (HKG:1075) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Capinfo Company Limited (HKG:1075) makes use of debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Capinfo

What Is Capinfo's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Capinfo had CN¥295.8m of debt, an increase on CN¥243.3m, over one year. But it also has CN¥773.1m in cash to offset that, meaning it has CN¥477.4m net cash.

A Look At Capinfo's Liabilities

The latest balance sheet data shows that Capinfo had liabilities of CN¥1.26b due within a year, and liabilities of CN¥32.0m falling due after that. Offsetting this, it had CN¥773.1m in cash and CN¥561.5m in receivables that were due within 12 months. So it actually has CN¥40.6m more liquid assets than total liabilities.

This surplus suggests that Capinfo has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Capinfo boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Capinfo'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, Capinfo saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

So How Risky Is Capinfo?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Capinfo 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 CN¥30m and booked a CN¥73m accounting loss. Given it only has net cash of CN¥477.4m, the company may need to raise more capital if it doesn't reach break-even soon. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Capinfo you should be aware of, and 1 of them shouldn't be ignored.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.