Health Check: How Prudently Does Carry Wealth Holdings (HKG:643) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Carry Wealth Holdings Limited (HKG:643) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Carry Wealth Holdings

What Is Carry Wealth Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Carry Wealth Holdings had HK$20.0m of debt, an increase on none, over one year. However, it does have HK$89.6m in cash offsetting this, leading to net cash of HK$69.5m.

How Healthy Is Carry Wealth Holdings' Balance Sheet?

According to the last reported balance sheet, Carry Wealth Holdings had liabilities of HK$92.2m due within 12 months, and liabilities of HK$14.8m due beyond 12 months. Offsetting this, it had HK$89.6m in cash and HK$41.8m in receivables that were due within 12 months. So it can boast HK$24.4m more liquid assets than total liabilities.

It's good to see that Carry Wealth Holdings has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Carry Wealth Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Carry Wealth 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.

In the last year Carry Wealth Holdings had a loss before interest and tax, and actually shrunk its revenue by 12%, to HK$291m. That's not what we would hope to see.

So How Risky Is Carry Wealth Holdings?

While Carry Wealth Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$29m. 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. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. For example, we've discovered 2 warning signs for Carry Wealth Holdings that you should be aware of before investing here.

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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