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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, C.P. Pokphand Co. Ltd. (HKG:43) does carry debt. 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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for C.P. Pokphand
How Much Debt Does C.P. Pokphand Carry?
The chart below, which you can click on for greater detail, shows that C.P. Pokphand had US$1.88b in debt in March 2019; about the same as the year before. However, it also had US$446.4m in cash, and so its net debt is US$1.43b.
A Look At C.P. Pokphand's Liabilities
Zooming in on the latest balance sheet data, we can see that C.P. Pokphand had liabilities of US$2.06b due within 12 months and liabilities of US$1.35b due beyond that. On the other hand, it had cash of US$446.4m and US$378.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$2.59b.
Given this deficit is actually higher than the company's market capitalization of US$2.16b, we think shareholders really should watch C.P. Pokphand's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.