Does Central Holding Group (HKG:1735) Have A 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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Central Holding Group Co. Ltd. (HKG:1735) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Central Holding Group

What Is Central Holding Group's Net Debt?

As you can see below, at the end of June 2022, Central Holding Group had HK$28.0m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has HK$62.5m in cash, leading to a HK$34.5m net cash position.

A Look At Central Holding Group's Liabilities

The latest balance sheet data shows that Central Holding Group had liabilities of HK$559.0m due within a year, and liabilities of HK$117.0m falling due after that. Offsetting this, it had HK$62.5m in cash and HK$483.9m in receivables that were due within 12 months. So its liabilities total HK$129.6m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Central Holding Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the HK$17.7b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Central Holding Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

We also note that Central Holding Group improved its EBIT from a last year's loss to a positive HK$4.6m. When analysing debt levels, the balance sheet is the obvious place to start. But it is Central Holding Group's earnings that will influence how the balance sheet holds up in the future. 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. Central Holding Group 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. Over the last year, Central Holding Group 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 it is always sensible to look at a company's total liabilities, it is very reassuring that Central Holding Group has HK$34.5m in net cash. So although we see some areas for improvement, we're not too worried about Central Holding Group's balance sheet. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Central Holding Group that you should be aware of.

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.