Does CIFI Holdings (Group) (HKG:884) have a healthy balance sheet?

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 synonymous with risk.” When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Above all, CIFI Holdings (Group) Co. Ltd. (HKG:884) is in debt. But should shareholders worry about its use of debt?

When is debt a problem?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. 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, many companies use debt to finance their growth, without any negative consequences. When we look at debt levels, we first consider cash and debt levels, together.

Check out our latest analysis for CIFI Holdings (Group)

What is the net indebtedness of CIFI Holdings (Group)?

You can click on the graph below for historical figures, but it shows that CIFI Holdings (Group) had 114.1 billion yen in debt in December 2021, compared to 126.2 billion yen a year before. However, he also had 49.3 billion Canadian yen in cash, so his net debt is 64.8 billion domestic yen.

SEHK: 884 Historical Debt to Equity April 18, 2022

How strong is the balance sheet of CIFI Holdings (Group)?

Zooming in on the latest balance sheet data, we can see that CIFI Holdings (Group) had liabilities of 223.7 billion Canadian yen due within 12 months and liabilities of 101.6 billion domestic yen due beyond of the. On the other hand, it had a cash position of 49.3 billion Canadian yen and 105.2 billion national yen of receivables due within one year. Thus, its liabilities total 170.9 billion Canadian yen more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥32.6b company, like a colossus towering above mere mortals. We would therefore be watching his balance sheet closely, no doubt. Ultimately, CIFI Holdings (Group) would likely need a significant recapitalization if its creditors demanded repayment.

We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).

The net debt of CIFI Holdings (Group) is 4.4 times its EBITDA, which represents a significant but still reasonable leverage effect. However, its interest coverage of 1k is very high, suggesting that debt interest charges are currently quite low. Importantly, CIFI Holdings (Group) has grown its EBIT by 38% over the last twelve months, and this growth will make it easier to manage its debt. The balance sheet is clearly the area to focus on when analyzing debt. But it is ultimately the company’s future profitability that will decide whether CIFI Holdings (Group) can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, a company can only repay its debts with cold hard cash, not with book profits. We must therefore clearly examine whether this EBIT generates a corresponding free cash flow. Over the past three years, CIFI Holdings (Group) has created free cash flow amounting to 16% of its EBIT, an interest-free performance. For us, such a low cash conversion creates a bit of paranoia about the ability to extinguish the debt.

Our point of view

We would go so far as to say that the level of total liabilities of CIFI Holdings (Group) is disappointing. But on the bright side, its interest coverage is a good sign and makes us more optimistic. Looking at the balance sheet and taking all of these factors into account, we think debt makes CIFI Holdings (Group) stock a bit risky. This isn’t necessarily a bad thing, but we would generally feel more comfortable with less leverage. 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, we have identified 5 warning signs for CIFI Holdings (Group) (1 cannot be ignored) which you should be aware of.

Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.

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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