Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, CITIC Guoan Information Industry Co., Ltd. (SZSE:000839) does carry debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for CITIC Guoan Information Industry
What Is CITIC Guoan Information Industry's Net Debt?
You can click the graphic below for the historical numbers, but it shows that CITIC Guoan Information Industry had CN¥2.44b of debt in September 2022, down from CN¥2.82b, one year before. However, it also had CN¥641.0m in cash, and so its net debt is CN¥1.80b.
How Strong Is CITIC Guoan Information Industry's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that CITIC Guoan Information Industry had liabilities of CN¥4.85b due within 12 months and liabilities of CN¥1.35b due beyond that. On the other hand, it had cash of CN¥641.0m and CN¥1.13b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥4.43b.
While this might seem like a lot, it is not so bad since CITIC Guoan Information Industry has a market capitalization of CN¥10.3b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is CITIC Guoan Information Industry'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.
In the last year CITIC Guoan Information Industry wasn't profitable at an EBIT level, but managed to grow its revenue by 17%, to CN¥2.7b. We usually like to see faster growth from unprofitable companies, but each to their own.
Caveat Emptor
Over the last twelve months CITIC Guoan Information Industry produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥491m. 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¥354m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. We've identified 1 warning sign with CITIC Guoan Information Industry , and understanding them should be part of your investment process.
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.