Is C Cheng Holdings (HKG:1486) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, C Cheng Holdings Limited (HKG:1486) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for C Cheng Holdings

What Is C Cheng Holdings's Net Debt?

As you can see below, C Cheng Holdings had HK$79.7m of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has HK$127.0m in cash, leading to a HK$47.3m net cash position.

How Strong Is C Cheng Holdings' Balance Sheet?

We can see from the most recent balance sheet that C Cheng Holdings had liabilities of HK$274.7m falling due within a year, and liabilities of HK$22.2m due beyond that. On the other hand, it had cash of HK$127.0m and HK$505.9m worth of receivables due within a year. So it actually has HK$335.9m more liquid assets than total liabilities.

This surplus liquidity suggests that C Cheng Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, C Cheng Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! 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.

In the last year C Cheng Holdings had a loss before interest and tax, and actually shrunk its revenue by 17%, to HK$643m. That's not what we would hope to see.

So How Risky Is C Cheng Holdings?

While C Cheng Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$4.6m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. The next few years will be important as the business matures. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for C Cheng Holdings you should be aware of, and 1 of them is a bit unpleasant.

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.