China State Construction Development Holdings (HKG:830) Has A Pretty Healthy Balance Sheet
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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies China State Construction Development Holdings Limited (HKG:830) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for China State Construction Development Holdings
What Is China State Construction Development Holdings's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2018 China State Construction Development Holdings had HK$719.6m of debt, an increase on HK$618.2m, over one year. On the flip side, it has HK$440.5m in cash leading to net debt of about HK$279.1m.
How Healthy Is China State Construction Development Holdings's Balance Sheet?
According to the last reported balance sheet, China State Construction Development Holdings had liabilities of HK$2.11b due within 12 months, and liabilities of HK$213.9m due beyond 12 months. Offsetting this, it had HK$440.5m in cash and HK$2.18b in receivables that were due within 12 months. So it actually has HK$291.0m more liquid assets than total liabilities.
It's good to see that China State Construction Development Holdings has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.