These 4 Measures Indicate That CR Construction Group Holdings (HKG:1582) Is Using Debt Safely

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.' 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. Importantly, CR Construction Group Holdings Limited (HKG:1582) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for CR Construction Group Holdings

What Is CR Construction Group Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 CR Construction Group Holdings had debt of HK$80.0m, up from none in one year. But it also has HK$118.7m in cash to offset that, meaning it has HK$38.7m net cash.

A Look At CR Construction Group Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that CR Construction Group Holdings had liabilities of HK$1.80b due within 12 months and liabilities of HK$19.6m due beyond that. Offsetting this, it had HK$118.7m in cash and HK$2.17b in receivables that were due within 12 months. So it actually has HK$472.3m more liquid assets than total liabilities.

This surplus liquidity suggests that CR Construction Group Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that CR Construction Group Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, CR Construction Group Holdings grew its EBIT by 23% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is CR Construction Group Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While CR Construction Group 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, CR Construction Group Holdings saw substantial negative free cash flow, in total. 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, the bottom line is that CR Construction Group Holdings has net cash of HK$38.7m and plenty of liquid assets. And it impressed us with its EBIT growth of 23% over the last year. So we don't think CR Construction Group Holdings's use of debt is risky. 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. To that end, you should learn about the 3 warning signs we've spotted with CR Construction Group Holdings (including 1 which is potentially serious) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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