Confidence Intelligence Holdings (HKG: 1967) has a somewhat strained record

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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Above all, Confidence Intelligence Holdings Limited (HKG: 1967) carries a debt. But does this debt concern shareholders?

When is debt dangerous?

Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first step in examining a company’s debt levels is to consider its cash flow and debt together.

See our latest analysis for Confidence Intelligence Holdings

What is Confidence Intelligence Holdings’ net debt?

As you can see below, at the end of June 2021, Confidence Intelligence Holdings had CN 15.1 million in debt, up from CN’s 3.38 million a year ago. Click on the image for more details. However, it has CNN 78.9 million in cash offsetting this, which leads to a net cash position of CNN 63.8 million.

SEHK: 1967 History of debt to equity November 3, 2021

How strong is Confidence Intelligence Holdings’ balance sheet?

The latest balance sheet data shows Confidence Intelligence Holdings had CN 104.0 million liabilities maturing within one year, and CN 26.7 million liabilities maturing thereafter. In compensation for these obligations, it had cash of CNN 78.9 million as well as receivables valued at CN 99.5 million due within 12 months. So he actually CN ¥ 47.7m Following liquid assets as total liabilities.

This fact indicates that Confidence Intelligence Holdings’ balance sheet looks quite strong, as its total liabilities roughly equal its liquid assets. So CN ¥ 4.45b is very unlikely to run out of cash, but it’s still worth keeping an eye on the balance sheet. In short, Confidence Intelligence Holdings has a net cash flow, so it’s fair to say that it doesn’t have a lot of debt!

Fortunately, the load of Confidence Intelligence Holdings is not too heavy, because its EBIT fell by 32% compared to last year. When it comes to paying down debt, lower income is no more helpful to your health than sugary sodas. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in isolation; since Confidence Intelligence Holdings will need revenue to repay this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.

But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. While Confidence Intelligence Holdings has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it’s building. (or erode) that cash balance. Over the past three years, Confidence Intelligence Holdings has experienced substantial total negative free cash flow. While investors no doubt expect this situation to reverse in due course, it clearly means that its use of debt is riskier.

In summary

While we agree with investors who find debt of concern, you should keep in mind that Confidence Intelligence Holdings has net cash of CNN 63.8 million, as well as more liquid assets than passive. So while we see areas for improvement, we are not overly worried about Confidence Intelligence Holdings’ record. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. Concrete example: we have spotted 4 warning signs for Confidence Intelligence Holdings you need to be aware of this, and 2 of them make us uncomfortable.

If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.

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

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