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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies E. Bon Holdings Limited (HKG:599) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for E. Bon Holdings
What Is E. Bon Holdings's Debt?
The image below, which you can click on for greater detail, shows that E. Bon Holdings had debt of HK$36.6m at the end of March 2019, a reduction from HK$41.4m over a year. However, it does have HK$66.4m in cash offsetting this, leading to net cash of HK$29.8m.
A Look At E. Bon Holdings's Liabilities
The latest balance sheet data shows that E. Bon Holdings had liabilities of HK$133.0m due within a year, and liabilities of HK$24.5m falling due after that. Offsetting this, it had HK$66.4m in cash and HK$135.8m in receivables that were due within 12 months. So it actually has HK$44.7m more liquid assets than total liabilities.
This surplus suggests that E. Bon Holdings is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, E. Bon Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
The modesty of its debt load may become crucial for E. Bon Holdings if management cannot prevent a repeat of the 58% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is E. Bon Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.