Does Computime Group (HKG:320) Have A Healthy Balance Sheet?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Computime Group Limited (HKG:320) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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

See our latest analysis for Computime Group

What Is Computime Group's Net Debt?

As you can see below, Computime Group had HK$116.8m of debt at September 2020, down from HK$145.9m a year prior. However, its balance sheet shows it holds HK$399.6m in cash, so it actually has HK$282.8m net cash.

How Strong Is Computime Group's Balance Sheet?

According to the last reported balance sheet, Computime Group had liabilities of HK$970.3m due within 12 months, and liabilities of HK$65.5m due beyond 12 months. Offsetting these obligations, it had cash of HK$399.6m as well as receivables valued at HK$346.4m due within 12 months. So it has liabilities totalling HK$289.8m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of HK$461.9m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Computime Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Computime Group'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.

In the last year Computime Group had a loss before interest and tax, and actually shrunk its revenue by 9.3%, to HK$3.2b. That's not what we would hope to see.

So How Risky Is Computime Group?

While Computime Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$119m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Computime Group is showing 4 warning signs in our investment analysis , and 1 of those is concerning...

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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