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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'. 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. We note that Chinese People Holdings Company Limited (HKG:681) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Chinese People Holdings
How Much Debt Does Chinese People Holdings Carry?
As you can see below, at the end of September 2019, Chinese People Holdings had CN¥157.7m of debt, up from CN¥128.4m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥432.2m in cash, so it actually has CN¥274.4m net cash.
A Look At Chinese People Holdings's Liabilities
Zooming in on the latest balance sheet data, we can see that Chinese People Holdings had liabilities of CN¥549.5m due within 12 months and liabilities of CN¥82.9m due beyond that. Offsetting these obligations, it had cash of CN¥432.2m as well as receivables valued at CN¥150.2m due within 12 months. So it has liabilities totalling CN¥50.0m more than its cash and near-term receivables, combined.
Since publicly traded Chinese People Holdings shares are worth a total of CN¥294.6m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Chinese People Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.
The good news is that Chinese People Holdings has increased its EBIT by 7.7% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Chinese People Holdings'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.