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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.' 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. Importantly, China Uptown Group Company Limited (HKG:2330) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.
View our latest analysis for China Uptown Group
What Is China Uptown Group's Net Debt?
As you can see below, China Uptown Group had CN¥47.9m of debt at December 2018, down from CN¥138.7m a year prior. But it also has CN¥53.2m in cash to offset that, meaning it has CN¥5.33m net cash.
How Strong Is China Uptown Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that China Uptown Group had liabilities of CN¥886.3m due within 12 months and liabilities of CN¥55.8m due beyond that. On the other hand, it had cash of CN¥53.2m and CN¥16.6m worth of receivables due within a year. So it has liabilities totalling CN¥872.3m more than its cash and near-term receivables, combined.
This deficit casts a shadow over the CN¥241.7m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, China Uptown Group would likely require a major re-capitalisation if it had to pay its creditors today. China Uptown Group boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. There's no doubt that we learn most about debt from the balance sheet. But it is China Uptown 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 China Uptown Group actually shrunk its revenue by 85%, to CN¥90m. That makes us nervous, to say the least.