Champion Alliance International Holdings (HKG:1629) Seems To Use Debt Rather Sparingly

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.' 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. We can see that Champion Alliance International Holdings Limited (HKG:1629) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Champion Alliance International Holdings

How Much Debt Does Champion Alliance International Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Champion Alliance International Holdings had CN¥19.8m of debt, an increase on CN¥14.8m, over one year. However, it does have CN¥113.2m in cash offsetting this, leading to net cash of CN¥93.4m.

How Healthy Is Champion Alliance International Holdings' Balance Sheet?

According to the last reported balance sheet, Champion Alliance International Holdings had liabilities of CN¥76.6m due within 12 months, and liabilities of CN¥36.1m due beyond 12 months. On the other hand, it had cash of CN¥113.2m and CN¥59.8m worth of receivables due within a year. So it can boast CN¥60.3m more liquid assets than total liabilities.

This excess liquidity is a great indication that Champion Alliance International Holdings' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Champion Alliance International Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Champion Alliance International Holdings grew its EBIT by 177% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Champion Alliance International Holdings will need earnings to service that debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Champion Alliance International Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Champion Alliance International Holdings's free cash flow amounted to 41% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Champion Alliance International Holdings has net cash of CN¥93.4m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 177% over the last year. So we don't think Champion Alliance International Holdings's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Champion Alliance International Holdings has 2 warning signs (and 1 which is potentially serious) we think you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.