Does Chen Hsong Holdings (HKG:57) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Chen Hsong Holdings Limited (HKG:57) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Chen Hsong Holdings

What Is Chen Hsong Holdings's Debt?

As you can see below, at the end of September 2020, Chen Hsong Holdings had HK$99.7m of debt, up from HK$74.5m a year ago. Click the image for more detail. But it also has HK$1.20b in cash to offset that, meaning it has HK$1.10b net cash.

How Healthy Is Chen Hsong Holdings' Balance Sheet?

The latest balance sheet data shows that Chen Hsong Holdings had liabilities of HK$945.9m due within a year, and liabilities of HK$98.4m falling due after that. Offsetting this, it had HK$1.20b in cash and HK$1.01b in receivables that were due within 12 months. So it actually has HK$1.17b more liquid assets than total liabilities.

This luscious liquidity implies that Chen Hsong 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. Succinctly put, Chen Hsong Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Chen Hsong Holdings grew its EBIT by 271% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Chen Hsong 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Chen Hsong 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. Happily for any shareholders, Chen Hsong Holdings actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case Chen Hsong Holdings has HK$1.10b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of HK$144m, being 289% of its EBIT. At the end of the day we're not concerned about Chen Hsong Holdings's debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Chen Hsong Holdings that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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.
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