Is China United Venture Investment (HKG:8159) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that China United Venture Investment Limited (HKG:8159) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for China United Venture Investment

What Is China United Venture Investment's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 China United Venture Investment had debt of HK$102.4m, up from HK$16.7m in one year. But it also has HK$140.1m in cash to offset that, meaning it has HK$37.7m net cash.

How Strong Is China United Venture Investment's Balance Sheet?

We can see from the most recent balance sheet that China United Venture Investment had liabilities of HK$275.6m falling due within a year, and liabilities of HK$15.6m due beyond that. Offsetting this, it had HK$140.1m in cash and HK$174.8m in receivables that were due within 12 months. So it actually has HK$23.7m more liquid assets than total liabilities.

This surplus suggests that China United Venture Investment is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, China United Venture Investment 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 you can't view debt in total isolation; since China United Venture Investment 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.

In the last year China United Venture Investment wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to HK$343m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is China United Venture Investment?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year China United Venture Investment had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through HK$52m of cash and made a loss of HK$82m. With only HK$37.7m on the balance sheet, it would appear that its going to need to raise capital again 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. 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. For example, we've discovered 2 warning signs for China United Venture Investment (1 is a bit concerning!) 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.