Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk. 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 C.banner International Holdings Limited (HKG:1028) makes use of 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.
What Is C.banner International Holdings's Net Debt?
You can click the graphic below for the historical numbers, but it shows that C.banner International Holdings had CN¥259.0m of debt in June 2019, down from CN¥340.6m, one year before. However, its balance sheet shows it holds CN¥284.3m in cash, so it actually has CN¥25.3m net cash.
How Healthy Is C.banner International Holdings's Balance Sheet?
According to the last reported balance sheet, C.banner International Holdings had liabilities of CN¥1.67b due within 12 months, and liabilities of CN¥183.2m due beyond 12 months. On the other hand, it had cash of CN¥284.3m and CN¥402.4m worth of receivables due within a year. So its liabilities total CN¥1.17b more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the CN¥496.2m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt At the end of the day, C.banner International Holdings would probably need a major re-capitalization if its creditors were to demand repayment. C.banner International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. There's no doubt that we learn most about debt from the balance sheet. But it is C.banner International Holdings'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.
In the last year C.banner International Holdings had negative earnings before interest and tax, and actually shrunk its revenue by 7.1%, to CN¥2.7b. That's not what we would hope to see.
So How Risky Is C.banner International Holdings?
Although C.banner International Holdings had negative earnings before interest and tax (EBIT) over the last twelve months, it generated positive free cash flow of CN¥130m. 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. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting C.banner International Holdings insider transactions.
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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