David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We can see that China Demeter Financial Investments Limited (HKG:8120) uses debt in his business. But does this debt worry shareholders?
Why is debt risky?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. If things go really bad, lenders can take over the business. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for China Demeter Financial Investments
What is the debt of China Demeter Financial Investments?
You can click on the graph below for historical figures, but it shows that in June 2022, China Demeter Financial Investments had HK$20.1 million in debt, an increase of HK$10.0 million , over one year. But he also has HK$76.4 million in cash to offset that, meaning he has a net cash of HK$56.4 million.
A look at the liabilities of China Demeter Financial Investments
The latest balance sheet data shows that China Demeter Financial Investments had liabilities of HK$128.7 million due within one year, and liabilities of HK$7.63 million falling due thereafter. In return, he had HK$76.4 million in cash and HK$101.7 million in debt due within 12 months. He can therefore boast that he has HK$41.9 million more in liquid assets than total Passives.
This abundant liquidity means that the balance sheet of China Demeter Financial Investments is as solid as a giant redwood. With that in mind, one could argue that its track record means the company is capable of dealing with some adversity. In short, China Demeter Financial Investments has a net cash position, so it’s fair to say that it doesn’t have a lot of debt! When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in total isolation; since China Demeter Financial Investments will need income to repay this debt. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
Year-over-year, China Demeter Financial Investments reported revenue of HK$160 million, a 3.5% gain, although it reported no earnings before interest and taxes. This rate of growth is a little slow for our liking, but it takes all types to make a world.
So, how risky is China Demeter Financial Investments?
By their very nature, companies that lose money are riskier than those with a long history of profitability. And last year, China Demeter Financial Investments posted a loss in earnings before interest and taxes (EBIT), actually. Indeed, during this period, it burned HK$19 million and suffered a loss of HK$37 million. Although this makes the business a bit risky, it is important to remember that it has a net cash position of HK$56.4 million. That means it could continue spending at its current rate for more than two years. Even if its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company does not produce free cash flow regularly. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. Be aware that China Demeter Financial Investments displays 3 warning signs in our investment analysis and 1 of them is a little unpleasant…
If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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