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.' 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. As with many other companies Central China New Life Limited (HKG:9983) makes use of debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Central China New Life
What Is Central China New Life's Debt?
You can click the graphic below for the historical numbers, but it shows that Central China New Life had CN¥52.0m of debt in December 2023, down from CN¥74.0m, one year before. But on the other hand it also has CN¥1.62b in cash, leading to a CN¥1.57b net cash position.
A Look At Central China New Life's Liabilities
The latest balance sheet data shows that Central China New Life had liabilities of CN¥2.55b due within a year, and liabilities of CN¥138.8m falling due after that. Offsetting these obligations, it had cash of CN¥1.62b as well as receivables valued at CN¥2.48b due within 12 months. So it actually has CN¥1.42b more liquid assets than total liabilities.
This excess liquidity is a great indication that Central China New Life's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Central China New Life has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Central China New Life can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Central China New Life had a loss before interest and tax, and actually shrunk its revenue by 9.6%, to CN¥2.8b. We would much prefer see growth.
So How Risky Is Central China New Life?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Central China New Life lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥90m and booked a CN¥574m accounting loss. Given it only has net cash of CN¥1.57b, the company may need to raise more capital if it doesn't reach break-even 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Central China New Life you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.