China Brilliant Global (HKG:8026) uses debt safely

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Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We can see that China Brilliant Global Limited (HKG:8026) uses debt in his business. But the more important question is: what risk does this debt create?

Why is debt risky?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.

Check out our latest analysis for China Brilliant Global

What is China Brilliant Global’s net debt?

As you can see below, at the end of March 2022, China Brilliant Global had a debt of HK$85.8 million, compared to HK$75.1 million a year ago. Click on the image for more details. However, his balance sheet shows he is holding HK$93.8 million in cash, so he actually has HK$8.07 million.

SEHK: 8026 Debt to Equity History August 23, 2022

How healthy is China Brilliant Global’s balance sheet?

Zooming in on the latest balance sheet data, we can see that China Brilliant Global had liabilities of HK$93.7 million due within 12 months and no liabilities due beyond that. In return, he had HK$93.8 million in cash and HK$53.6 million in debt due within 12 months. He can therefore boast that he has HK$53.8 million more in cash than total Passives.

This short-term liquidity is a sign that China Brilliant Global could probably service its debt easily, as its balance sheet is far from stretched. Simply put, the fact that China Brilliant Global has more cash than debt is arguably a good indication that it can safely manage its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in total isolation; since China Brilliant Global will need revenue to repay this debt. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.

Last year, China Brilliant Global was not profitable in terms of EBIT, but managed to increase its revenue by 126% to HK$91 million. There is therefore no doubt that shareholders encourage growth

So how risky is China globally?

Statistically speaking, businesses that lose money are riskier than those that make money. And we note that China Brilliant Global posted a loss in earnings before interest and taxes (EBIT) over the past year. And during the same period, it recorded a negative free cash outflow of HK$50 million and recorded a book loss of HK$38 million. But at least it has HK$8.07 million on the balance sheet to spend on near-term growth. The good news for shareholders is that China Brilliant Global has skyrocketing revenue growth, so there is a very good chance that it can increase its free cash flow in the years to come. High-growth, for-profit businesses may well be risky, but they can also offer great rewards. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, China Brilliant Global has 3 warning signs (and 1 of concern) that we think you should know about.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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