We Think Asia Cement (China) Holdings (HKG:743) Can Manage Its Debt With Ease

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 Asia Cement (China) Holdings Corporation (HKG:743) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Asia Cement (China) Holdings

What Is Asia Cement (China) Holdings's Debt?

As you can see below, Asia Cement (China) Holdings had CN¥4.71b of debt at June 2021, down from CN¥6.89b a year prior. But on the other hand it also has CN¥7.18b in cash, leading to a CN¥2.47b net cash position.

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

Zooming in on the latest balance sheet data, we can see that Asia Cement (China) Holdings had liabilities of CN¥4.04b due within 12 months and liabilities of CN¥2.34b due beyond that. On the other hand, it had cash of CN¥7.18b and CN¥4.51b worth of receivables due within a year. So it can boast CN¥5.30b more liquid assets than total liabilities.

This luscious liquidity implies that Asia Cement (China) Holdings' balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Asia Cement (China) Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Asia Cement (China) Holdings has increased its EBIT by 3.8% over twelve months, which should ease any concerns about debt repayment. 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 Asia Cement (China) 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, while the tax-man may adore accounting profits, lenders only accept 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 generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case Asia Cement (China) Holdings has CN¥2.47b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 101% of that EBIT to free cash flow, bringing in CN¥3.8b. When it comes to Asia Cement (China) Holdings's debt, we sufficiently relaxed that our mind turns to the jacuzzi. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Asia Cement (China) Holdings that you should be aware of.

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.

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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