These 4 Measures Indicate That Changhua Holding Group (SHSE:605018) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Changhua Holding Group Co., Ltd. (SHSE:605018) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Changhua Holding Group

What Is Changhua Holding Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Changhua Holding Group had CN¥72.1m of debt in September 2024, down from CN¥160.1m, one year before. But it also has CN¥412.5m in cash to offset that, meaning it has CN¥340.4m net cash.

How Strong Is Changhua Holding Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Changhua Holding Group had liabilities of CN¥425.3m due within 12 months and liabilities of CN¥62.4m due beyond that. Offsetting these obligations, it had cash of CN¥412.5m as well as receivables valued at CN¥332.9m due within 12 months. So it actually has CN¥257.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Changhua Holding Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Changhua Holding Group has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Changhua Holding Group grew its EBIT by 82% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Changhua Holding Group will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Changhua Holding Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Changhua Holding Group burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Changhua Holding Group has net cash of CN¥340.4m, as well as more liquid assets than liabilities. And we liked the look of last year's 82% year-on-year EBIT growth. So we don't have any problem with Changhua Holding Group's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Changhua Holding Group (1 doesn't sit too well with us!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.