In This Article:
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Chu Kong Shipping Enterprises (Group) Company Limited (HKG:560) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Chu Kong Shipping Enterprises (Group)
What Is Chu Kong Shipping Enterprises (Group)'s Debt?
You can click the graphic below for the historical numbers, but it shows that Chu Kong Shipping Enterprises (Group) had HK$277.7m of debt in December 2018, down from HK$380.4m, one year before. But it also has HK$1.23b in cash to offset that, meaning it has HK$948.3m net cash.
How Healthy Is Chu Kong Shipping Enterprises (Group)'s Balance Sheet?
According to the last reported balance sheet, Chu Kong Shipping Enterprises (Group) had liabilities of HK$710.9m due within 12 months, and liabilities of HK$254.2m due beyond 12 months. On the other hand, it had cash of HK$1.23b and HK$420.5m worth of receivables due within a year. So it actually has HK$681.4m more liquid assets than total liabilities.
This surplus strongly suggests that Chu Kong Shipping Enterprises (Group) has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Simply put, the fact that Chu Kong Shipping Enterprises (Group) has more cash than debt is arguably a good indication that it can manage its debt safely.
It is just as well that Chu Kong Shipping Enterprises (Group)'s load is not too heavy, because its EBIT was down 37% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Chu Kong Shipping Enterprises (Group) 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.