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. We note that CNFC Overseas Fisheries Co.,Ltd (SZSE:000798) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for CNFC Overseas FisheriesLtd
What Is CNFC Overseas FisheriesLtd's Net Debt?
The image below, which you can click on for greater detail, shows that at September 2023 CNFC Overseas FisheriesLtd had debt of CN¥2.90b, up from CN¥237.0m in one year. On the flip side, it has CN¥703.2m in cash leading to net debt of about CN¥2.20b.
A Look At CNFC Overseas FisheriesLtd's Liabilities
The latest balance sheet data shows that CNFC Overseas FisheriesLtd had liabilities of CN¥3.26b due within a year, and liabilities of CN¥311.3m falling due after that. On the other hand, it had cash of CN¥703.2m and CN¥296.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.57b.
This deficit is considerable relative to its market capitalization of CN¥3.71b, so it does suggest shareholders should keep an eye on CNFC Overseas FisheriesLtd's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is CNFC Overseas FisheriesLtd'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.
Over 12 months, CNFC Overseas FisheriesLtd made a loss at the EBIT level, and saw its revenue drop to CN¥440m, which is a fall of 86%. To be frank that doesn't bode well.
Caveat Emptor
While CNFC Overseas FisheriesLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥26m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥154m of cash over the last year. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that CNFC Overseas FisheriesLtd is showing 1 warning sign in our investment analysis , you should know about...
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.
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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.