Is Chanhigh Holdings (HKG:2017) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Chanhigh Holdings Limited (HKG:2017) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Chanhigh Holdings

How Much Debt Does Chanhigh Holdings Carry?

The chart below, which you can click on for greater detail, shows that Chanhigh Holdings had CN¥686.7m in debt in June 2023; about the same as the year before. But it also has CN¥845.9m in cash to offset that, meaning it has CN¥159.2m net cash.

How Healthy Is Chanhigh Holdings' Balance Sheet?

The latest balance sheet data shows that Chanhigh Holdings had liabilities of CN¥1.26b due within a year, and liabilities of CN¥105.0m falling due after that. Offsetting these obligations, it had cash of CN¥845.9m as well as receivables valued at CN¥1.36b due within 12 months. So it actually has CN¥846.3m more liquid assets than total liabilities.

This excess liquidity is a great indication that Chanhigh Holdings' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Chanhigh Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Chanhigh Holdings grew its EBIT by 33% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Chanhigh 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. While Chanhigh 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. During the last three years, Chanhigh Holdings burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, the bottom line is that Chanhigh Holdings has net cash of CN¥159.2m and plenty of liquid assets. And it impressed us with its EBIT growth of 33% over the last year. So is Chanhigh 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. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Chanhigh Holdings .

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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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.