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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, China City Infrastructure Group Limited (HKG:2349) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for China City Infrastructure Group
How Much Debt Does China City Infrastructure Group Carry?
The chart below, which you can click on for greater detail, shows that China City Infrastructure Group had HK$361.5m in debt in June 2024; about the same as the year before. However, because it has a cash reserve of HK$9.99m, its net debt is less, at about HK$351.5m.
How Strong Is China City Infrastructure Group's Balance Sheet?
We can see from the most recent balance sheet that China City Infrastructure Group had liabilities of HK$146.7m falling due within a year, and liabilities of HK$431.6m due beyond that. Offsetting this, it had HK$9.99m in cash and HK$13.0m in receivables that were due within 12 months. So its liabilities total HK$555.2m more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the HK$118.9m 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 definitely think shareholders need to watch this one closely. At the end of the day, China City Infrastructure Group would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. 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.
Over 12 months, China City Infrastructure Group made a loss at the EBIT level, and saw its revenue drop to HK$48m, which is a fall of 18%. That's not what we would hope to see.
Caveat Emptor
Not only did China City Infrastructure Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping HK$19m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of HK$117m in the last year. So we think this stock is quite risky. We'd prefer to pass. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for China City Infrastructure Group you should be aware of, and 1 of them doesn't sit too well with us.
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.