These 4 Measures Indicate That COFCO Capital Holdings (SZSE:002423) Is Using Debt Extensively

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 the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for COFCO Capital Holdings

What Is COFCO Capital Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that COFCO Capital Holdings had CN¥6.73b of debt in March 2024, down from CN¥14.5b, one year before. However, its balance sheet shows it holds CN¥37.0b in cash, so it actually has CN¥30.3b net cash.

A Look At COFCO Capital Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that COFCO Capital Holdings had liabilities of CN¥38.2b due within 12 months and liabilities of CN¥66.3b due beyond that. On the other hand, it had cash of CN¥37.0b and CN¥3.36b worth of receivables due within a year. So its liabilities total CN¥64.1b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥17.6b 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'd watch its balance sheet closely, without a doubt. At the end of the day, COFCO Capital Holdings would probably need a major re-capitalization if its creditors were to demand repayment. 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.

Sadly, COFCO Capital Holdings's EBIT actually dropped 2.6% in the last year. If earnings continue on that decline then managing that debt will be difficult like delivering hot soup on a unicycle. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since COFCO Capital Holdings 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While COFCO Capital Holdings does have more liabilities than liquid assets, it also has net cash of CN¥30.3b. And it impressed us with free cash flow of CN¥8.9b, being 319% of its EBIT. So while COFCO Capital Holdings does not have a great balance sheet, it's certainly not too bad. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. 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.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

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