CK Asset Holdings (HKG:1113) seems to be using debt quite wisely
Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Above all, CK Asset Holdings Limited (HKG:1113) is in debt. But the real question is whether this debt makes the business risky.
Why is debt risky?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. If things go really bad, lenders can take over the business. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
Check out our latest analysis for CK Asset Holdings
What is the net debt of CK Asset Holdings?
The image below, which you can click on for more details, shows that as of December 2021, CK Asset Holdings had HK$96.5 billion in debt, up from HK$77.9 billion in one year . However, he also had HK$62.6 billion in cash, so his net debt is HK$33.9 billion.
A look at the liabilities of CK Asset Holdings
Zooming in on the latest balance sheet data, we can see that CK Asset Holdings had liabilities of HK$78.5 billion due within 12 months and liabilities of HK$91.9 billion due beyond. As compensation for these obligations, it had liquid assets of HK$62.6 billion as well as receivables valued at HK$4.99 billion and payable within 12 months. Thus, its liabilities total HK$102.9 billion more than the combination of its cash and short-term receivables.
While that might sound like a lot, it’s not that bad since CK Asset Holdings has a huge market capitalization of HK$189.8 billion, so it could likely bolster its balance sheet by raising capital if needed. But we definitely want to keep our eyes peeled for indications that its debt is too risky.
We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). Thus, we consider debt to earnings with and without amortization and depreciation expense.
CK Asset Holdings has a low debt to EBITDA ratio of just 1.2. And remarkably, although she has net debt, she has actually received more interest in the last twelve months than she has had to pay. So there’s no doubt that this company can go into debt and still be cool as a cucumber. The good news is that CK Asset Holdings increased its year-over-year EBIT by 7.8%, which should ease any debt repayment concerns. There is no doubt that we learn the most about debt from the balance sheet. But it is future earnings, more than anything, that will determine CK Asset Holdings’ ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Finally, a company can only repay its debts with cold hard cash, not with book profits. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, CK Asset Holdings has actually produced more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Our point of view
The good news is that CK Asset Holdings’ demonstrated ability to cover interest costs with EBIT delights us like a fluffy puppy does a toddler. But, on a darker note, we’re a bit concerned about his total passive level. When we consider the range of factors above, it seems that CK Asset Holdings is quite sensitive with its use of debt. While this carries some risk, it can also improve shareholder returns. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 1 warning sign for CK Asset Holdings you should know.
If you are interested in investing in businesses that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.