Xinda Investment Holdings (HKG:1281) Has Debt But No Earnings; Should You Worry?

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. As with many other companies Xinda Investment Holdings Limited (HKG:1281) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Xinda Investment Holdings

How Much Debt Does Xinda Investment Holdings Carry?

The image below, which you can click on for greater detail, shows that Xinda Investment Holdings had debt of CN¥198.7m at the end of June 2022, a reduction from CN¥223.2m over a year. But on the other hand it also has CN¥207.5m in cash, leading to a CN¥8.82m net cash position.

A Look At Xinda Investment Holdings' Liabilities

According to the last reported balance sheet, Xinda Investment Holdings had liabilities of CN¥102.1m due within 12 months, and liabilities of CN¥197.5m due beyond 12 months. Offsetting this, it had CN¥207.5m in cash and CN¥428.7m in receivables that were due within 12 months. So it actually has CN¥336.5m more liquid assets than total liabilities.

This excess liquidity is a great indication that Xinda Investment Holdings' balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Xinda Investment Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Xinda Investment 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.

In the last year Xinda Investment Holdings had a loss before interest and tax, and actually shrunk its revenue by 44%, to CN¥320m. That makes us nervous, to say the least.

So How Risky Is Xinda Investment Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Xinda Investment Holdings lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥4.1m and booked a CN¥337m accounting loss. With only CN¥8.82m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 Xinda Investment Holdings (1 doesn't sit too well with us!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.