Is Cowell e Holdings (HKG:1415) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Cowell e Holdings Inc. (HKG:1415) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Cowell e Holdings

How Much Debt Does Cowell e Holdings Carry?

The image below, which you can click on for greater detail, shows that Cowell e Holdings had debt of US$15.8m at the end of December 2022, a reduction from US$72.9m over a year. However, its balance sheet shows it holds US$146.5m in cash, so it actually has US$130.7m net cash.

A Look At Cowell e Holdings' Liabilities

The latest balance sheet data shows that Cowell e Holdings had liabilities of US$252.3m due within a year, and liabilities of US$18.2m falling due after that. Offsetting these obligations, it had cash of US$146.5m as well as receivables valued at US$195.8m due within 12 months. So it actually has US$71.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Cowell e Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Cowell e Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Cowell e Holdings grew its EBIT by 35% over the last twelve months, and that growth will make it easier to handle its debt. 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 Cowell e 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, a company can only pay off debt with cold hard cash, not accounting profits. Cowell e Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Cowell e Holdings generated free cash flow amounting to a very robust 83% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Cowell e Holdings has US$130.7m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$97m, being 83% of its EBIT. So is Cowell e Holdings's debt a risk? It doesn't seem so to us. 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, we've discovered 1 warning sign for Cowell e Holdings that you should be aware of before investing here.

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.