Does C Cheng Holdings (HKG:1486) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies C Cheng Holdings Limited (HKG:1486) makes use of debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for C Cheng Holdings

How Much Debt Does C Cheng Holdings Carry?

As you can see below, at the end of December 2021, C Cheng Holdings had HK$76.3m of debt, up from HK$60.6m a year ago. Click the image for more detail. But on the other hand it also has HK$215.3m in cash, leading to a HK$139.0m net cash position.

A Look At C Cheng Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that C Cheng Holdings had liabilities of HK$305.5m due within 12 months and liabilities of HK$75.9m due beyond that. On the other hand, it had cash of HK$215.3m and HK$475.0m worth of receivables due within a year. So it actually has HK$308.9m more liquid assets than total liabilities.

This surplus strongly suggests that C Cheng Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that C Cheng Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

We also note that C Cheng Holdings improved its EBIT from a last year's loss to a positive HK$3.2m. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since C Cheng Holdings will need earnings to service that debt. 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. C Cheng 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 year, C Cheng Holdings saw substantial negative free cash flow, in total. 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 C Cheng Holdings has net cash of HK$139.0m and plenty of liquid assets. So we are not troubled with C Cheng Holdings's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for C Cheng Holdings (of which 1 is a bit concerning!) you should know about.

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.