David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. 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 can see that CK Hutchison Holdings Limited (HKG:1) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for CK Hutchison Holdings
What Is CK Hutchison Holdings's Debt?
The chart below, which you can click on for greater detail, shows that CK Hutchison Holdings had HK$345.1b in debt in June 2019; about the same as the year before. However, it also had HK$123.3b in cash, and so its net debt is HK$221.8b.
A Look At CK Hutchison Holdings's Liabilities
Zooming in on the latest balance sheet data, we can see that CK Hutchison Holdings had liabilities of HK$233.4b due within 12 months and liabilities of HK$475.2b due beyond that. Offsetting these obligations, it had cash of HK$123.3b as well as receivables valued at HK$39.6b due within 12 months. So it has liabilities totalling HK$545.7b more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the HK$289.8b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet." So we'd watch its balance sheet closely, without a doubt After all, CK Hutchison Holdings would likely require a major re-capitalisation if it had to pay its creditors today.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.