Does Confidence Intelligence Holdings (HKG:1967) have a healthy balance sheet?
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. We can see that Trust Intelligence Holdings Limited (HKG:1967) uses debt in his business. But the more important question is: what risk does this debt create?
What risk does debt carry?
Debt and other liabilities become risky for a business when it cannot easily meet those 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) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we look at debt levels, we first consider cash and debt levels, together.
See our latest analysis for Confidence Intelligence Holdings
How much debt does Confidence Intelligence Holdings have?
The image below, which you can click on for more details, shows that Confidence Intelligence Holdings had 12.6 million yen in debt at the end of December 2021, a reduction from 13.9 million yen on a year. However, he has 65.0 million National Yen in cash to offset this, resulting in a net cash of 52.4 million National Yen.
A look at the liabilities of Confidence Intelligence Holdings
Zooming in on the latest balance sheet data, we can see that Confidence Intelligence Holdings had liabilities of 70.2 million Canadian yen due within 12 months and liabilities of 33.4 million domestic yen due beyond. In return, he had 65.0 million Cambodian yen in cash and 110.0 million Cambodian yen in receivables due within 12 months. So he actually has 71.4 million Canadian yen After liquid assets than total liabilities.
Given the size of Confidence Intelligence Holdings, it appears its liquid assets are well balanced with its total liabilities. It is therefore highly unlikely that the ¥6.35 billion CN Company will run out of cash, but it is still worth keeping an eye on the balance sheet. In short, Confidence Intelligence Holdings has clean cash, so it’s fair to say that it doesn’t have a lot of debt!
But the bad news is that Confidence Intelligence Holdings has seen its EBIT plunge 12% in the last twelve months. If this rate of decline in profits continues, the company could find itself in a difficult situation. The balance sheet is clearly the area to focus on when analyzing debt. But it is the profits of Confidence Intelligence Holdings that will influence the balance sheet in the future. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. Confidence Intelligence Holdings may have net cash on the balance sheet, but it is always interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its needs and its ability to manage debt. Over the past three years, Confidence Intelligence Holdings has experienced substantial negative free cash flow, in total. While this may be the result of spending for growth, it makes debt much riskier.
While we sympathize with investors who find debt a concern, you should keep in mind that Confidence Intelligence Holdings has net cash of 52.4 million yen, as well as more liquid assets than liabilities. We therefore have no problem with the use of debt by Confidence Intelligence Holdings. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. For example, Confidence Intelligence Holdings has 3 warning signs (and 2 that shouldn’t be ignored) that we think you should know about.
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
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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.