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 E-House (China) Enterprise Holdings Limited (HKG:2048) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 E-House (China) Enterprise Holdings's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2021 E-House (China) Enterprise Holdings had debt of CN¥7.33b, up from CN¥5.58b in one year. But it also has CN¥7.52b in cash to offset that, meaning it has CN¥183.8m net cash.
How Healthy Is E-House (China) Enterprise Holdings' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that E-House (China) Enterprise Holdings had liabilities of CN¥11.0b due within 12 months and liabilities of CN¥3.79b due beyond that. On the other hand, it had cash of CN¥7.52b and CN¥9.83b worth of receivables due within a year. So it actually has CN¥2.53b more liquid assets than total liabilities.
This surplus strongly suggests that E-House (China) Enterprise Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that E-House (China) Enterprise Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. 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 E-House (China) Enterprise 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.
In the last year E-House (China) Enterprise Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 51%, to CN¥11b. With any luck the company will be able to grow its way to profitability.
So How Risky Is E-House (China) Enterprise Holdings?
While E-House (China) Enterprise Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥411m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Given it also grew revenue by 51% over the last year, we think there's a good chance the company is on track. That growth could mean this is one stock well worth watching. 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. Be aware that E-House (China) Enterprise Holdings is showing 4 warning signs in our investment analysis , and 1 of those is significant...
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.
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