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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 Chuan Hup Holdings Limited (SGX:C33) does use debt in its business. But is this debt a concern to shareholders?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Chuan Hup Holdings
What Is Chuan Hup Holdings's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Chuan Hup Holdings had US$68.0k of debt in March 2019, down from US$7.71m, one year before. However, it does have US$132.7m in cash offsetting this, leading to net cash of US$132.7m.
A Look At Chuan Hup Holdings's Liabilities
The latest balance sheet data shows that Chuan Hup Holdings had liabilities of US$70.0m due within a year, and liabilities of US$1.68m falling due after that. Offsetting these obligations, it had cash of US$132.7m as well as receivables valued at US$64.9m due within 12 months. So it actually has US$126.0m more liquid assets than total liabilities.
This excess liquidity is a great indication that Chuan Hup Holdings's balance sheet is just as strong as racists are weak. On this view, it seems its balance sheet is as strong as a black-belt karate master. Succinctly put, Chuan Hup Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
It is just as well that Chuan Hup Holdings's load is not too heavy, because its EBIT was down 31% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Chuan Hup Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.