Tongcheng-Elong Holdings (HKG:780) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Tongcheng-Elong Holdings Limited (HKG:780) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

Check out our latest analysis for Tongcheng-Elong Holdings

How Much Debt Does Tongcheng-Elong Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Tongcheng-Elong Holdings had CN¥128.1m of debt in June 2021, down from CN¥171.0m, one year before. However, it does have CN¥6.56b in cash offsetting this, leading to net cash of CN¥6.43b.

How Healthy Is Tongcheng-Elong Holdings' Balance Sheet?

According to the last reported balance sheet, Tongcheng-Elong Holdings had liabilities of CN¥4.58b due within 12 months, and liabilities of CN¥820.2m due beyond 12 months. On the other hand, it had cash of CN¥6.56b and CN¥1.30b worth of receivables due within a year. So it can boast CN¥2.45b more liquid assets than total liabilities.

This surplus suggests that Tongcheng-Elong Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Tongcheng-Elong Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Tongcheng-Elong Holdings grew its EBIT by 37% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Tongcheng-Elong Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Tongcheng-Elong Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Tongcheng-Elong Holdings actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Tongcheng-Elong Holdings has net cash of CN¥6.43b, as well as more liquid assets than liabilities. The cherry on top was that in converted 178% of that EBIT to free cash flow, bringing in CN¥2.2b. So is Tongcheng-Elong Holdings's debt a risk? It doesn't seem so to us. 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. To that end, you should be aware of the 2 warning signs we've spotted with Tongcheng-Elong Holdings .

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.
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