Does C Cheng Holdings (HKG:1486) 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.” So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Like many other companies C Cheng Holdings Limited (HKG:1486) uses debt. But the real question is whether this debt makes the business risky.
Why is debt risky?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, many companies use debt to finance their growth, without any negative consequences. When we think about a company’s use of debt, we first look at cash and debt together.
Check out our latest analysis for C Cheng Holdings
How much debt does C Cheng Holdings have?
As you can see below, at the end of December 2021, C Cheng Holdings had a debt of HK$76.3 million, compared to HK$60.6 million a year ago. Click on the image for more details. But on the other hand, it also has HK$215.3 million in cash, resulting in a net cash position of HK$139.0 million.
A look at the liabilities of C Cheng Holdings
Zooming in on the latest balance sheet data, we can see that C Cheng Holdings had liabilities of HK$305.5 million due within 12 months and liabilities of HK$75.9 million due beyond. On the other hand, it had a cash position of HK$215.3 million and HK$475.0 million of receivables within one year. So he actually has HK$308.9 million After liquid assets than total liabilities.
This surplus strongly suggests that C Cheng Holdings has a rock-solid balance sheet (and debt is nothing to worry about). With that in mind, one could argue that its track record means the company is capable of dealing with some adversity. Simply put, the fact that C Cheng Holdings has more cash than debt is arguably a good indication that it can safely manage its debt.
We also note that C Cheng Holdings improved its EBIT from last year’s loss to a positive result of HK$3.2 million. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in total isolation; since C Cheng Holdings will need revenue to repay this debt. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
Finally, while the taxman may love accounting profits, lenders only accept cash. C Cheng 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 year, C Cheng Holdings has had substantial negative free cash flow, overall. 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, the bottom line is that C Cheng Holdings has net cash of HK$139.0 million and plenty of liquid assets. We are therefore not concerned about the use of C Cheng Holdings debt. 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. These risks can be difficult to spot. Every business has them, and we’ve spotted 2 warning signs for C Cheng Holdings (1 of which is a little worrying!) that you should know about.
If you are interested in investing in businesses that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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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.