Health Check: How Prudently Does Chuan Holdings (HKG:1420) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Chuan Holdings Limited (HKG:1420) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Chuan Holdings

How Much Debt Does Chuan Holdings Carry?

The image below, which you can click on for greater detail, shows that Chuan Holdings had debt of S$3.69m at the end of June 2022, a reduction from S$4.90m over a year. However, it does have S$32.8m in cash offsetting this, leading to net cash of S$29.1m.

A Look At Chuan Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Chuan Holdings had liabilities of S$17.3m due within 12 months and liabilities of S$4.37m due beyond that. Offsetting these obligations, it had cash of S$32.8m as well as receivables valued at S$43.2m due within 12 months. So it can boast S$54.3m more liquid assets than total liabilities.

This luscious liquidity implies that Chuan Holdings' balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Chuan Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Chuan 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.

Over 12 months, Chuan Holdings reported revenue of S$87m, which is a gain of 6.4%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Chuan Holdings?

Although Chuan Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of S$2.4m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. There's no doubt the next few years will be crucial to how the business matures. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Chuan Holdings is showing 3 warning signs in our investment analysis , and 1 of those can't be ignored...

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.