E. Bon Holdings (HKG:599) Has A Pretty 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.' 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 E. Bon Holdings Limited (HKG:599) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out 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 at September 2020 E. Bon Holdings had debt of HK$51.6m, up from HK$30.6m in one year. But on the other hand it also has HK$180.4m in cash, leading to a HK$128.8m net cash position.

A Look At E. Bon Holdings' Liabilities

The latest balance sheet data shows that E. Bon Holdings had liabilities of HK$211.0m due within a year, and liabilities of HK$61.5m falling due after that. Offsetting this, it had HK$180.4m in cash and HK$147.6m in receivables that were due within 12 months. So it can boast HK$55.6m more liquid assets than total liabilities.

This surplus suggests that E. Bon Holdings is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues 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!

Sadly, E. Bon Holdings's EBIT actually dropped 6.3% in the last year. If earnings continue on that decline then managing that debt will be difficult like delivering hot soup on a unicycle. 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 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 E. Bon 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, E. Bon Holdings actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that E. Bon Holdings has net cash of HK$128.8m, as well as more liquid assets than liabilities. The cherry on top was that in converted 278% of that EBIT to free cash flow, bringing in HK$129m. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with E. Bon Holdings (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

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. 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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