David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 CIFI Holdings (Group) Co. Ltd. (HKG:884) makes use of debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for CIFI Holdings (Group)

What Is CIFI Holdings (Group)'s Debt?

As you can see below, CIFI Holdings (Group) had CN¥102.3b of debt at June 2023, down from CN¥114.1b a year prior. However, it does have CN¥19.8b in cash offsetting this, leading to net debt of about CN¥82.5b.

A Look At CIFI Holdings (Group)'s Liabilities

The latest balance sheet data shows that CIFI Holdings (Group) had liabilities of CN¥253.0b due within a year, and liabilities of CN¥34.9b falling due after that. On the other hand, it had cash of CN¥19.8b and CN¥98.6b worth of receivables due within a year. So its liabilities total CN¥169.5b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥2.45b 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, CIFI Holdings (Group) would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine CIFI Holdings (Group)'s ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, CIFI Holdings (Group) made a loss at the EBIT level, and saw its revenue drop to CN¥49b, which is a fall of 52%. That makes us nervous, to say the least.

Caveat Emptor

Not only did CIFI Holdings (Group)'s revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CN¥14b at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost CN¥23b in the last year. So we think buying this stock is 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. For example CIFI Holdings (Group) has 3 warning signs (and 2 which shouldn't be ignored) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.