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Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 CNC Holdings Limited (HKG:8356) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for CNC Holdings
What Is CNC Holdings's Net Debt?
The image below, which you can click on for greater detail, shows that CNC Holdings had debt of HK$268.5m at the end of March 2019, a reduction from HK$293.1m over a year. However, it also had HK$90.2m in cash, and so its net debt is HK$178.3m.
How Healthy Is CNC Holdings's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that CNC Holdings had liabilities of HK$174.6m due within 12 months and liabilities of HK$284.5m due beyond that. On the other hand, it had cash of HK$90.2m and HK$117.7m worth of receivables due within a year. So it has liabilities totalling HK$251.2m more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the HK$150.0m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt After all, CNC Holdings would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is CNC Holdings's earnings that will influence how the balance sheet holds up in the future. 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.
Over 12 months, CNC Holdings saw its revenue hold pretty steady. While that hardly impresses, its not too bad either.