E. Bon Holdings (HKG:599) Could Easily Take On More Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that E. Bon Holdings Limited (HKG:599) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. Bon Holdings

What Is E. Bon Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that E. Bon Holdings had debt of HK$44.5m at the end of September 2022, a reduction from HK$54.3m over a year. But on the other hand it also has HK$168.0m in cash, leading to a HK$123.5m net cash position.

How Healthy Is E. Bon Holdings' Balance Sheet?

The latest balance sheet data shows that E. Bon Holdings had liabilities of HK$227.3m due within a year, and liabilities of HK$37.7m falling due after that. On the other hand, it had cash of HK$168.0m and HK$125.7m worth of receivables due within a year. So it can boast HK$28.8m more liquid assets than total liabilities.

This excess liquidity suggests that E. Bon Holdings is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, E. Bon Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that E. Bon Holdings has boosted its EBIT by 75%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is E. Bon Holdings'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. E. Bon 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. Over the last three years, E. Bon Holdings actually produced more free cash flow than EBIT. 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 E. Bon Holdings has HK$123.5m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 271% of that EBIT to free cash flow, bringing in HK$66m. So is E. Bon Holdings's debt a risk? It doesn't seem so to us. 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. For example E. Bon Holdings has 3 warning signs (and 1 which is concerning) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.