We Think CK Asset Holdings (HKG:1113) Can Stay On Top Of Its Debt

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 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. We note that CK Asset Holdings Limited (HKG:1113) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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

Check out our latest analysis for CK Asset Holdings

What Is CK Asset Holdings's Net Debt?

As you can see below, CK Asset Holdings had HK$48.5b of debt at December 2022, down from HK$96.5b a year prior. However, it does have HK$61.2b in cash offsetting this, leading to net cash of HK$12.7b.

A Look At CK Asset Holdings' Liabilities

The latest balance sheet data shows that CK Asset Holdings had liabilities of HK$55.0b due within a year, and liabilities of HK$66.1b falling due after that. Offsetting this, it had HK$61.2b in cash and HK$3.68b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$56.2b.

This deficit isn't so bad because CK Asset Holdings is worth a massive HK$170.7b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, CK Asset Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, CK Asset Holdings's EBIT dived 19%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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'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 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. Over the last three years, CK Asset Holdings actually produced more free cash flow than EBIT. 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 CK Asset Holdings does have more liabilities than liquid assets, it also has net cash of HK$12.7b. And it impressed us with free cash flow of HK$33b, being 119% of its EBIT. So we are not troubled with CK Asset Holdings's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - CK Asset Holdings has 1 warning sign we think 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.

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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.