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How to Stay Out Of Investing Trouble? Ask China Fishery Group Limited

Nassim Taleb, the author of several great books like The Black Swan and Antifragile: Things That Gain from Disorder, has a deep quote: “People focus on role models; it is more effective to find antimodels – people you don’t want to resemble when you grow up.”

What Taleb’s quote really highlights is the importance of negative knowledge – in other words, knowing what not to do. It is useful in life as well as investing.

So, how can we stay out of investing trouble? Seafood supplier China Fishery Group Limited (SGX: B0Z) can be one great antimodel.

Earlier today, the company had halted the trading of its shares, “pending the release of an announcement” that’s related to itself and a subsidiary, China Fisheries International Limited.

There’s no word yet on what the announcement will be as of the time of writing (4:46 pm), but a Bloomberg article by Christopher Langner and Tu Lianting, published a few hours after the trading halt was in place, may point us in the right direction. They wrote:

““HSBC filed an application to the High Court of the Hong Kong Special Administrative Region to appoint provisional liquidators to two companies with operations in Hong Kong: China Fishery Group Ltd. and China Fisheries International Ltd.,” HSBC spokesman Adam Harper said by e-mail Thursday. The bank has also petitioned for the winding up of the two companies, Harper added.”

In other words, China Fishery Group’s lenders have taken action against the company, likely because it has had trouble servicing its debt. The Bloomberg piece also stated that China Fishery Group’s credit rating had been downgraded earlier this month by Moody’s Investors Service to Caa2, the third-lowest credit score. Moody’s didn’t think that China Fishery Group had sufficient cash resources to meet both its operating and debt-related expenses over the next year.

China Fishery Group’s latest financials, for the quarter ended 28 June 2015, saw it carrying US$870 million worth of borrowings on its balance sheet but just US$41 million in cash. The company had also ended the quarter with negative operating cash flow of US$129 million.

China Fishery Group's Balance Sheet (2)

Source: S&P Capital IQ

The late super investor Walter Schloss once said (emphasis mine), “I like to look at the balance sheet and I don’t like debt because it can really get a company into trouble.”

It now appears that China Fishery has landed itself in hot soup because of its penchant for borrowing. The firm had been playing with the proverbial fire for a number of years now as you can see in the chart above, which illustrates changes in its balance sheet since September 2009.

A Fool’s take

None of the above is meant to say that companies with high debt are necessarily bad and will make for poor investments. To the contrary, smart use of leverage can be a great way for management to build value for shareholders.

But, as investors, we stand a higher chance of staying out of harm’s way if we are to keep an eye on a company’s balance sheet and make sure that it’s not biting off more than it can chew when it comes to debt.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any company mentioned.