We Think China International Holdings (SGX:BEH) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, China International Holdings Limited (SGX:BEH) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for China International Holdings

What Is China International Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that China International Holdings had CN¥99.8m of debt in December 2020, down from CN¥105.0m, one year before. But it also has CN¥127.6m in cash to offset that, meaning it has CN¥27.8m net cash.

How Strong Is China International Holdings' Balance Sheet?

According to the last reported balance sheet, China International Holdings had liabilities of CN¥221.5m due within 12 months, and liabilities of CN¥85.1m due beyond 12 months. Offsetting this, it had CN¥127.6m in cash and CN¥195.1m in receivables that were due within 12 months. So it actually has CN¥16.0m more liquid assets than total liabilities.

This surplus suggests that China International Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, China International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, China International Holdings turned things around in the last 12 months, delivering and EBIT of CN¥42m. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since China International Holdings will need earnings to service that debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. China International 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. Over the last year, China International Holdings saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case China International Holdings has CN¥27.8m in net cash and a decent-looking balance sheet. So we are not troubled with China International Holdings's debt use. 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. We've identified 4 warning signs with China International Holdings (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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. 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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