Is Cornerstone Financial Holdings (HKG: 8112) Using Too Much Debt?
David Iben put it well when he said: âVolatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Like many other companies Cornerstone Financial Holdings Limited (HKG: 8112) uses debt. But does this debt concern shareholders?
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. 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. Of course, many companies use debt to finance their growth without negative consequences. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
Check out our latest review for Cornerstone Financial Holdings
How much debt does Cornerstone Financial Holdings have?
The image below, which you can click for more details, shows that as of June 2021 Cornerstone Financial Holdings was in debt of HK $ 32.7million, up from HK $ 1.62million in one year. . However, his balance sheet shows that he has HK $ 84.7million in cash, so he actually has HK $ 52.0million in net cash.
A look at the liabilities of Cornerstone Financial Holdings
The latest balance sheet data shows Cornerstone Financial Holdings had HK $ 65.8 million in debt due within one year, and HK $ 20.8 million in debt maturing thereafter. In compensation for these obligations, he had cash of HK $ 84.7 million as well as receivables valued at HK $ 137.1 million due within 12 months. So he actually has HK $ 135.3million Following liquid assets as total liabilities.
This excess liquidity is a good indication that Cornerstone Financial Holdings’ balance sheet is almost as strong as that of Fort Knox. With this in mind, one could postulate that its track record means that the company is able to cope with some adversity. Put simply, the fact that Cornerstone Financial Holdings has more cash than debt is arguably a good indication that it can safely manage its debt. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in isolation; since Cornerstone Financial Holdings will need income to repay this debt. So if you want to know more about its profits, it might be worth checking out this long term profit trend chart.
Over the past year, Cornerstone Financial Holdings has incurred a loss before interest and taxes and has actually reduced revenue by 5.8%, to HK $ 53 million. This is not what we hope to see.
So how risky is Cornerstone Financial Holdings?
While Cornerstone Financial Holdings lost money on earnings before interest and taxes (EBIT), it actually generated positive free cash flow of HK $ 33 million. So, although it is in deficit, it does not appear to have too much short-term balance sheet risk, given the net cash position. There is no doubt that the next few years will be crucial for the maturation of the company. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example, we discovered 4 warning signs for Cornerstone Financial Holdings (2 are potentially serious!) Which you should be aware of before investing here.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.