Is E-Commodities Holdings (HKG:1733) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 E-Commodities Holdings Limited (HKG:1733) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for E-Commodities Holdings

What Is E-Commodities Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 E-Commodities Holdings had HK$2.05b of debt, an increase on HK$1.41b, over one year. But it also has HK$2.96b in cash to offset that, meaning it has HK$908.3m net cash.

How Healthy Is E-Commodities Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that E-Commodities Holdings had liabilities of HK$8.36b due within 12 months and liabilities of HK$640.0m due beyond that. Offsetting this, it had HK$2.96b in cash and HK$4.88b in receivables that were due within 12 months. So it has liabilities totalling HK$1.16b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since E-Commodities Holdings has a market capitalization of HK$5.15b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, E-Commodities Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, E-Commodities Holdings grew its EBIT by 23% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is E-Commodities 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. E-Commodities Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, E-Commodities Holdings produced sturdy free cash flow equating to 68% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While E-Commodities Holdings does have more liabilities than liquid assets, it also has net cash of HK$908.3m. And we liked the look of last year's 23% year-on-year EBIT growth. So is E-Commodities Holdings's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for E-Commodities 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.

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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.