China Chengtong Development Group (HKG:217) Has A Rock Solid Balance Sheet
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk. 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 China Chengtong Development Group Limited (HKG:217) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 China Chengtong Development Group
What Is China Chengtong Development Group's Debt?
As you can see below, China Chengtong Development Group had HK$200.6m of debt at June 2019, down from HK$220.9m a year prior. But it also has HK$1.72b in cash to offset that, meaning it has HK$1.52b net cash.
A Look At China Chengtong Development Group's Liabilities
Zooming in on the latest balance sheet data, we can see that China Chengtong Development Group had liabilities of HK$527.5m due within 12 months and liabilities of HK$45.3m due beyond that. Offsetting these obligations, it had cash of HK$1.72b as well as receivables valued at HK$358.3m due within 12 months. So it can boast HK$1.51b more liquid assets than total liabilities.
This surplus liquidity suggests that China Chengtong Development Group's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Succinctly put, China Chengtong Development Group boasts net cash, so it's fair to say it does not have a heavy debt load!
In fact China Chengtong Development Group's saving grace is its low debt levels, because its EBIT has tanked 89% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is China Chengtong Development Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. China Chengtong Development Group 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 three years, China Chengtong Development Group actually produced more free cash flow than EBIT. 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 we empathize with investors who find debt concerning, the bottom line is that China Chengtong Development Group has net cash of HK$1.52b and plenty of liquid assets. The cherry on top was that in converted 178% of that EBIT to free cash flow, bringing in -HK$177.8m. So we don't think China Chengtong Development Group's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in China Chengtong Development Group, you may well want to click here to check an interactive graph of its earnings per share history.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
