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

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 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 China Overseas Property Holdings Limited (HKG:2669) makes use of debt. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is China Overseas Property Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that China Overseas Property Holdings had CN¥50.0m of debt in December 2024, down from CN¥56.4m, one year before. But on the other hand it also has CN¥5.92b in cash, leading to a CN¥5.87b net cash position.

A Look At China Overseas Property Holdings' Liabilities

According to the last reported balance sheet, China Overseas Property Holdings had liabilities of CN¥6.74b due within 12 months, and liabilities of CN¥90.8m due beyond 12 months. On the other hand, it had cash of CN¥5.92b and CN¥3.72b worth of receivables due within a year. So it can boast CN¥2.81b more liquid assets than total liabilities.

It's good to see that China Overseas Property Holdings has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, China Overseas Property Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for China Overseas Property Holdings

And we also note warmly that China Overseas Property Holdings grew its EBIT by 12% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if China Overseas Property Holdings can strengthen its balance sheet over time. 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. 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 69% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that China Overseas Property Holdings has net cash of CN¥5.87b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥1.2b, being 69% of its EBIT. So we don't think China Overseas Property Holdings's use of debt is risky. Given China Overseas Property Holdings has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.