EEKA Fashion Holdings (HKG:3709) Has A Rock Solid 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. As with many other companies EEKA Fashion Holdings Limited (HKG:3709) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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.

See our latest analysis for EEKA Fashion Holdings

What Is EEKA Fashion Holdings's Debt?

As you can see below, EEKA Fashion Holdings had CN¥452.3m of debt at June 2021, down from CN¥540.8m a year prior. However, its balance sheet shows it holds CN¥1.22b in cash, so it actually has CN¥762.9m net cash.

How Strong Is EEKA Fashion Holdings' Balance Sheet?

According to the last reported balance sheet, EEKA Fashion Holdings had liabilities of CN¥1.73b due within 12 months, and liabilities of CN¥431.3m due beyond 12 months. On the other hand, it had cash of CN¥1.22b and CN¥505.1m worth of receivables due within a year. So it has liabilities totalling CN¥445.2m more than its cash and near-term receivables, combined.

Since publicly traded EEKA Fashion Holdings shares are worth a total of CN¥5.98b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, EEKA Fashion Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, EEKA Fashion Holdings grew its EBIT by 63% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine EEKA Fashion 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While EEKA Fashion 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, EEKA Fashion Holdings actually produced more free cash flow than EBIT over the last three years. 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 it is always sensible to look at a company's total liabilities, it is very reassuring that EEKA Fashion Holdings has CN¥762.9m in net cash. The cherry on top was that in converted 193% of that EBIT to free cash flow, bringing in CN¥1.4b. So we don't think EEKA Fashion Holdings's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with EEKA Fashion Holdings .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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