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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Carry Wealth Holdings Limited (HKG:643) 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Carry Wealth Holdings

What Is Carry Wealth Holdings's Debt?

The image below, which you can click on for greater detail, shows that at December 2021 Carry Wealth Holdings had debt of HK$65.0m, up from HK$22.1m in one year. But on the other hand it also has HK$99.7m in cash, leading to a HK$34.7m net cash position.

A Look At Carry Wealth Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Carry Wealth Holdings had liabilities of HK$123.8m due within 12 months and liabilities of HK$17.0m due beyond that. Offsetting this, it had HK$99.7m in cash and HK$49.3m in receivables that were due within 12 months. So it actually has HK$8.05m more liquid assets than total liabilities.

This surplus suggests that Carry Wealth Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Carry Wealth Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! 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.

Over 12 months, Carry Wealth Holdings reported revenue of HK$441m, which is a gain of 52%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Carry Wealth Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Carry Wealth Holdings had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through HK$14m of cash and made a loss of HK$19k. However, it has net cash of HK$34.7m, so it has a bit of time before it will need more capital. Carry Wealth Holdings's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. For instance, we've identified 1 warning sign for Carry Wealth Holdings that you should be aware of.

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.