Does KE Holdings (NYSE:BEKE) Have A Healthy Balance Sheet?

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. Importantly, KE Holdings Inc. (NYSE:BEKE) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for KE Holdings

What Is KE Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that KE Holdings had CN¥520.0m of debt in September 2023, down from CN¥600.0m, one year before. However, its balance sheet shows it holds CN¥54.2b in cash, so it actually has CN¥53.7b net cash.

How Strong Is KE Holdings' Balance Sheet?

We can see from the most recent balance sheet that KE Holdings had liabilities of CN¥38.0b falling due within a year, and liabilities of CN¥8.44b due beyond that. Offsetting this, it had CN¥54.2b in cash and CN¥3.50b in receivables that were due within 12 months. So it can boast CN¥11.3b more liquid assets than total liabilities.

This short term liquidity is a sign that KE Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, KE 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, KE Holdings turned things around in the last 12 months, delivering and EBIT of CN¥5.5b. 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 KE 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While KE 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. Over the last year, KE Holdings actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that KE Holdings has net cash of CN¥53.7b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥11b, being 206% of its EBIT. So is KE 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. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with KE Holdings .

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.