COFCO Capital Holdings (SZSE:002423) Has A Pretty Healthy Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies COFCO Capital Holdings Co., Ltd. (SZSE:002423) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for COFCO Capital Holdings

What Is COFCO Capital Holdings's Debt?

As you can see below, COFCO Capital Holdings had CN¥11.0b of debt at September 2023, down from CN¥11.6b a year prior. However, it does have CN¥40.9b in cash offsetting this, leading to net cash of CN¥29.9b.

A Look At COFCO Capital Holdings' Liabilities

We can see from the most recent balance sheet that COFCO Capital Holdings had liabilities of CN¥42.3b falling due within a year, and liabilities of CN¥60.1b due beyond that. On the other hand, it had cash of CN¥40.9b and CN¥4.32b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥57.1b.

The deficiency here weighs heavily on the CN¥20.4b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, COFCO Capital Holdings would likely require a major re-capitalisation if it had to pay its creditors today. COFCO Capital Holdings boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

Notably, COFCO Capital Holdings's EBIT launched higher than Elon Musk, gaining a whopping 475% on last year. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if COFCO Capital Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While COFCO Capital Holdings 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. Over the last three years, COFCO Capital Holdings actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although COFCO Capital Holdings's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥29.9b. The cherry on top was that in converted 341% of that EBIT to free cash flow, bringing in CN¥3.3b. So we are not troubled with COFCO Capital Holdings's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for COFCO Capital Holdings you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.