CK Asset Holdings (HKG:1113) Has A Rock Solid Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies CK Asset Holdings Limited (HKG:1113) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 CK Asset Holdings

What Is CK Asset Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that CK Asset Holdings had HK$45.9b of debt in June 2022, down from HK$93.2b, one year before. However, its balance sheet shows it holds HK$59.0b in cash, so it actually has HK$13.1b net cash.

How Strong Is CK Asset Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CK Asset Holdings had liabilities of HK$45.3b due within 12 months and liabilities of HK$61.6b due beyond that. On the other hand, it had cash of HK$59.0b and HK$12.5b worth of receivables due within a year. So it has liabilities totalling HK$35.4b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since CK Asset Holdings has a huge market capitalization of HK$164.9b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, CK Asset Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that CK Asset Holdings grew its EBIT by 18% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine CK Asset 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While CK Asset 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, CK Asset Holdings actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While CK Asset Holdings does have more liabilities than liquid assets, it also has net cash of HK$13.1b. The cherry on top was that in converted 109% of that EBIT to free cash flow, bringing in HK$33b. So we don't think CK Asset Holdings's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for CK Asset Holdings you should be aware of.

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. 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.