Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies China Technology Industry Group Limited (HKG:8111) makes use of debt. But is this debt a concern to shareholders?
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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 China Technology Industry Group
How Much Debt Does China Technology Industry Group Carry?
The image below, which you can click on for greater detail, shows that China Technology Industry Group had debt of CN¥44.4m at the end of September 2024, a reduction from CN¥61.3m over a year. However, because it has a cash reserve of CN¥2.12m, its net debt is less, at about CN¥42.3m.
How Healthy Is China Technology Industry Group's Balance Sheet?
According to the last reported balance sheet, China Technology Industry Group had liabilities of CN¥29.8m due within 12 months, and liabilities of CN¥32.3m due beyond 12 months. On the other hand, it had cash of CN¥2.12m and CN¥50.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥9.66m.
Given China Technology Industry Group has a market capitalization of CN¥66.5m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But it is China Technology Industry 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.
Given it has no significant operating revenue at the moment, shareholders will be hoping China Technology Industry Group can make progress and gain better traction for the business, before it runs low on cash.
Caveat Emptor
Importantly, China Technology Industry Group had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CN¥45m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥4.6m of cash over the last year. So in short it's a really risky stock. 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. For example - China Technology Industry Group has 4 warning signs we think you should be aware of.
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.
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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.