Is Champion Alliance International Holdings (HKG:1629) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Champion Alliance International Holdings Limited (HKG:1629) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for Champion Alliance International Holdings

What Is Champion Alliance International Holdings's Debt?

The image below, which you can click on for greater detail, shows that Champion Alliance International Holdings had debt of CN¥41.1m at the end of December 2021, a reduction from CN¥51.4m over a year. However, it does have CN¥149.8m in cash offsetting this, leading to net cash of CN¥108.7m.

How Healthy Is Champion Alliance International Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Champion Alliance International Holdings had liabilities of CN¥302.2m due within 12 months and liabilities of CN¥26.6m due beyond that. Offsetting these obligations, it had cash of CN¥149.8m as well as receivables valued at CN¥93.7m due within 12 months. So its liabilities total CN¥85.3m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Champion Alliance International Holdings is worth CN¥225.3m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Champion Alliance International Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Champion Alliance International Holdings grew its EBIT by 219% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Champion Alliance International 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the most recent three years, Champion Alliance International Holdings recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

Although Champion Alliance International Holdings's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥108.7m. And it impressed us with its EBIT growth of 219% over the last year. So we don't think Champion Alliance International Holdings's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Champion Alliance International Holdings you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.