Does E-Commodities Holdings (HKG:1733) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies E-Commodities Holdings Limited (HKG:1733) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 E-Commodities Holdings

How Much Debt Does E-Commodities Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that E-Commodities Holdings had HK$2.23b of debt in June 2022, down from HK$2.51b, one year before. But it also has HK$4.30b in cash to offset that, meaning it has HK$2.07b net cash.

A Look At E-Commodities Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that E-Commodities Holdings had liabilities of HK$8.98b due within 12 months and liabilities of HK$217.8m due beyond that. Offsetting this, it had HK$4.30b in cash and HK$4.57b in receivables that were due within 12 months. So its liabilities total HK$330.3m more than the combination of its cash and short-term receivables.

Given E-Commodities Holdings has a market capitalization of HK$4.33b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, E-Commodities Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that E-Commodities Holdings grew its EBIT by 240% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since E-Commodities 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, a company can only pay off debt with cold hard cash, not accounting profits. While E-Commodities 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. Over the last three years, E-Commodities Holdings recorded free cash flow worth a fulsome 81% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

We could understand if investors are concerned about E-Commodities Holdings's liabilities, but we can be reassured by the fact it has has net cash of HK$2.07b. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in HK$3.1b. So is E-Commodities 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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with E-Commodities Holdings , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.