Does Liu Chong Hing Investment (HKG:194) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 note that Liu Chong Hing Investment Limited (HKG:194) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Liu Chong Hing Investment

How Much Debt Does Liu Chong Hing Investment Carry?

As you can see below, Liu Chong Hing Investment had HK$1.47b of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has HK$1.96b in cash to offset that, meaning it has HK$485.9m net cash.

How Strong Is Liu Chong Hing Investment's Balance Sheet?

We can see from the most recent balance sheet that Liu Chong Hing Investment had liabilities of HK$918.5m falling due within a year, and liabilities of HK$1.36b due beyond that. Offsetting this, it had HK$1.96b in cash and HK$72.4m in receivables that were due within 12 months. So its liabilities total HK$242.0m more than the combination of its cash and short-term receivables.

Since publicly traded Liu Chong Hing Investment shares are worth a total of HK$2.74b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Liu Chong Hing Investment also has more cash than debt, so we're pretty confident it can manage its debt safely.

Shareholders should be aware that Liu Chong Hing Investment's EBIT was down 52% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But it is Liu Chong Hing Investment's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Liu Chong Hing Investment 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, Liu Chong Hing Investment reported free cash flow worth 17% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Liu Chong Hing Investment has HK$485.9m in net cash. So although we see some areas for improvement, we're not too worried about Liu Chong Hing Investment's balance sheet. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with Liu Chong Hing Investment (including 1 which makes us a bit uncomfortable) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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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