Does Asia Cement (China) Holdings (HKG:743) 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.' 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 Asia Cement (China) Holdings Corporation (HKG:743) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

View our latest analysis for Asia Cement (China) Holdings

How Much Debt Does Asia Cement (China) Holdings Carry?

As you can see below, Asia Cement (China) Holdings had CN¥3.13b of debt at March 2021, down from CN¥8.49b a year prior. However, its balance sheet shows it holds CN¥5.42b in cash, so it actually has CN¥2.29b net cash.

How Strong Is Asia Cement (China) Holdings' Balance Sheet?

The latest balance sheet data shows that Asia Cement (China) Holdings had liabilities of CN¥2.35b due within a year, and liabilities of CN¥2.34b falling due after that. On the other hand, it had cash of CN¥5.42b and CN¥4.75b worth of receivables due within a year. So it actually has CN¥5.48b more liquid assets than total liabilities.

This excess liquidity is a great indication that Asia Cement (China) 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. Succinctly put, Asia Cement (China) Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

While Asia Cement (China) Holdings doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Asia Cement (China) Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Asia Cement (China) 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, Asia Cement (China) 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 Asia Cement (China) Holdings has net cash of CN¥2.29b, as well as more liquid assets than liabilities. The cherry on top was that in converted 103% of that EBIT to free cash flow, bringing in CN¥4.5b. So is Asia Cement (China) Holdings's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. 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 Asia Cement (China) 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. 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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