China Overseas Property Holdings (HKG:2669) Has A Rock Solid Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that China Overseas Property Holdings Limited (HKG:2669) does use debt in its business. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for China Overseas Property Holdings

What Is China Overseas Property Holdings's Debt?

As you can see below, at the end of December 2022, China Overseas Property Holdings had HK$68.2m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has HK$4.80b in cash, leading to a HK$4.73b net cash position.

How Strong Is China Overseas Property Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that China Overseas Property Holdings had liabilities of HK$6.36b due within 12 months and liabilities of HK$101.6m due beyond that. Offsetting this, it had HK$4.80b in cash and HK$2.96b in receivables that were due within 12 months. So it actually has HK$1.30b more liquid assets than total liabilities.

This short term liquidity is a sign that China Overseas Property Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that China Overseas Property Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that China Overseas Property Holdings has been able to increase its EBIT by 29% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine China Overseas Property Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. China Overseas Property 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. During the last three years, China Overseas Property Holdings produced sturdy free cash flow equating to 78% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case China Overseas Property Holdings has HK$4.73b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 29% over the last year. So is China Overseas Property Holdings's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of China Overseas Property Holdings's earnings per share history for free.

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.