Confidence Intelligence Holdings (HKG:1967) Has A Somewhat Strained 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Confidence Intelligence Holdings Limited (HKG:1967) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Confidence Intelligence Holdings

What Is Confidence Intelligence Holdings's Net Debt?

As you can see below, at the end of June 2021, Confidence Intelligence Holdings had CN¥15.1m of debt, up from CN¥3.38m a year ago. Click the image for more detail. However, it does have CN¥78.9m in cash offsetting this, leading to net cash of CN¥63.8m.

How Strong Is Confidence Intelligence Holdings' Balance Sheet?

The latest balance sheet data shows that Confidence Intelligence Holdings had liabilities of CN¥104.0m due within a year, and liabilities of CN¥26.7m falling due after that. Offsetting these obligations, it had cash of CN¥78.9m as well as receivables valued at CN¥99.5m due within 12 months. So it actually has CN¥47.7m more liquid assets than total liabilities.

This state of affairs indicates that Confidence Intelligence Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥4.45b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Confidence Intelligence Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Confidence Intelligence Holdings's load is not too heavy, because its EBIT was down 32% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Confidence Intelligence Holdings 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Confidence Intelligence Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Confidence Intelligence Holdings saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Confidence Intelligence Holdings has net cash of CN¥63.8m, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about Confidence Intelligence Holdings's balance sheet. 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 4 warning signs for Confidence Intelligence Holdings you should be aware of, and 2 of them make us uncomfortable.

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.

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.

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