We Think Cowell e Holdings (HKG:1415) 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Cowell e Holdings Inc. (HKG:1415) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Cowell e Holdings

What Is Cowell e Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Cowell e Holdings had US$209.3m of debt, an increase on US$145.9m, over one year. However, its balance sheet shows it holds US$388.4m in cash, so it actually has US$179.2m net cash.

How Healthy Is Cowell e Holdings' Balance Sheet?

The latest balance sheet data shows that Cowell e Holdings had liabilities of US$310.1m due within a year, and liabilities of US$14.5m falling due after that. On the other hand, it had cash of US$388.4m and US$88.7m worth of receivables due within a year. So it can boast US$152.5m 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. Simply put, the fact that Cowell e Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Cowell e Holdings's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Cowell e Holdings can strengthen its balance sheet over time. 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 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. In the last three years, Cowell e Holdings's free cash flow amounted to 47% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Cowell e Holdings has US$179.2m in net cash and a decent-looking balance sheet. So we are not troubled with Cowell e Holdings's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Cowell e Holdings you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.