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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies C Cheng Holdings Limited (HKG:1486) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for C Cheng Holdings

What Is C Cheng Holdings's Debt?

As you can see below, at the end of June 2024, C Cheng Holdings had HK$91.5m of debt, up from HK$79.7m a year ago. Click the image for more detail. However, it also had HK$86.3m in cash, and so its net debt is HK$5.16m.

A Look At C Cheng Holdings' Liabilities

The latest balance sheet data shows that C Cheng Holdings had liabilities of HK$222.8m due within a year, and liabilities of HK$9.67m falling due after that. Offsetting this, it had HK$86.3m in cash and HK$356.9m in receivables that were due within 12 months. So it can boast HK$210.7m 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). Having regard to this fact, we think its balance sheet is as strong as an ox. There's no doubt that we learn most about debt from the balance sheet. But it is C Cheng 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.

Over 12 months, C Cheng Holdings saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, C Cheng Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable HK$28m at the EBIT level. Having said that, the balance sheet has plenty of liquid assets for now. That will give the company some time and space to grow and develop its business as need be. The company is risky because it will grow into the future to get to profitability and free cash flow. 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. Case in point: We've spotted 3 warning signs for C Cheng Holdings you should be aware of, and 1 of them makes us a bit uncomfortable.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.