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.' 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. We can see that Cybernaut International Holdings Company Limited (HKG:1020) does use debt in its business. But should shareholders be worried about its use of debt?
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 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Cybernaut International Holdings Carry?
The chart below, which you can click on for greater detail, shows that Cybernaut International Holdings had CN¥302.6m in debt in June 2019; about the same as the year before. However, because it has a cash reserve of CN¥83.9m, its net debt is less, at about CN¥218.7m.
How Strong Is Cybernaut International Holdings's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Cybernaut International Holdings had liabilities of CN¥90.8m due within 12 months and liabilities of CN¥385.8m due beyond that. Offsetting these obligations, it had cash of CN¥83.9m as well as receivables valued at CN¥344.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥48.1m.
Of course, Cybernaut International Holdings has a market capitalization of CN¥653.2m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Cybernaut International Holdings will need earnings to service that debt. 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, Cybernaut International Holdings saw its revenue drop to CN¥269m, which is a fall of 20%. That makes us nervous, to say the least.
Not only did Cybernaut International Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥12m at the EBIT level. 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥47m in negative free cash flow over the last twelve months. So in short it's a really risky stock. For riskier companies like Cybernaut International Holdings I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.