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. As with many other companies COFCO Capital Holdings Co., Ltd. (SZSE:002423) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for COFCO Capital Holdings
What Is COFCO Capital Holdings's Net Debt?
As you can see below, at the end of March 2023, COFCO Capital Holdings had CN¥14.5b of debt, up from CN¥12.8b a year ago. Click the image for more detail. But it also has CN¥45.2b in cash to offset that, meaning it has CN¥30.7b net cash.
How Healthy Is COFCO Capital Holdings' Balance Sheet?
According to the last reported balance sheet, COFCO Capital Holdings had liabilities of CN¥46.8b due within 12 months, and liabilities of CN¥53.7b due beyond 12 months. On the other hand, it had cash of CN¥45.2b and CN¥3.63b worth of receivables due within a year. So its liabilities total CN¥51.7b more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the CN¥19.9b 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, COFCO Capital Holdings would likely require a major re-capitalisation if it had to pay its creditors today. COFCO Capital Holdings boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.
Better yet, COFCO Capital Holdings grew its EBIT by 256% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since COFCO Capital Holdings will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. COFCO Capital Holdings 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. Happily for any shareholders, COFCO Capital Holdings actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing Up
While COFCO Capital Holdings does have more liabilities than liquid assets, it also has net cash of CN¥30.7b. And it impressed us with free cash flow of CN¥4.3b, being 339% of its EBIT. So we are not troubled with COFCO Capital Holdings's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for COFCO Capital Holdings that you should be aware of before investing here.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.