Does Confidence Intelligence Holdings (HKG:1967) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Confidence Intelligence Holdings Limited (HKG:1967) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Confidence Intelligence Holdings

What Is Confidence Intelligence Holdings's Debt?

The image below, which you can click on for greater detail, shows that Confidence Intelligence Holdings had debt of CN¥12.6m at the end of December 2021, a reduction from CN¥13.9m over a year. However, it does have CN¥65.0m in cash offsetting this, leading to net cash of CN¥52.4m.

A Look At Confidence Intelligence Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Confidence Intelligence Holdings had liabilities of CN¥70.2m due within 12 months and liabilities of CN¥33.4m due beyond that. Offsetting this, it had CN¥65.0m in cash and CN¥110.0m in receivables that were due within 12 months. So it actually has CN¥71.4m more liquid assets than total liabilities.

Having regard to Confidence Intelligence Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥6.35b 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!

But the bad news is that Confidence Intelligence Holdings has seen its EBIT plunge 12% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Confidence Intelligence Holdings'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Confidence Intelligence Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Confidence Intelligence Holdings saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far 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¥52.4m, as well as more liquid assets than liabilities. So we don't have any problem with Confidence Intelligence Holdings's use of debt. 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 example Confidence Intelligence Holdings has 3 warning signs (and 2 which shouldn't be ignored) we think you should know about.

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.