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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. 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. Importantly, China City Infrastructure Group Limited (HKG:2349) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for China City Infrastructure Group
What Is China City Infrastructure Group's Net Debt?
You can click the graphic below for the historical numbers, but it shows that China City Infrastructure Group had HK$995.2m of debt in June 2019, down from HK$1.43b, one year before. However, it does have HK$22.0m in cash offsetting this, leading to net debt of about HK$973.2m.
A Look At China City Infrastructure Group's Liabilities
We can see from the most recent balance sheet that China City Infrastructure Group had liabilities of HK$795.0m falling due within a year, and liabilities of HK$871.5m due beyond that. Offsetting this, it had HK$22.0m in cash and HK$350.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$1.29b.
The deficiency here weighs heavily on the HK$625.7m 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, China City Infrastructure Group would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is China City Infrastructure Group'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.