Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Capinfo Company Limited (HKG:1075) does carry debt. But should shareholders be worried about its use of debt?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Capinfo
How Much Debt Does Capinfo Carry?
The image below, which you can click on for greater detail, shows that at June 2024 Capinfo had debt of CN¥279.5m, up from CN¥225.6m in one year. However, its balance sheet shows it holds CN¥682.0m in cash, so it actually has CN¥402.5m net cash.
How Strong Is Capinfo's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Capinfo had liabilities of CN¥1.18b due within 12 months and liabilities of CN¥51.6m due beyond that. On the other hand, it had cash of CN¥682.0m and CN¥470.7m worth of receivables due within a year. So it has liabilities totalling CN¥81.6m more than its cash and near-term receivables, combined.
Of course, Capinfo has a market capitalization of CN¥616.8m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Capinfo also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Capinfo's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Capinfo reported revenue of CN¥1.5b, which is a gain of 3.6%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Capinfo?
Although Capinfo had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥125m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Capinfo you should be aware of, and 1 of them is concerning.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.