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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. We can see that E-House (China) Enterprise Holdings Limited (HKG:2048) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 E-House (China) Enterprise Holdings
What Is E-House (China) Enterprise Holdings's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2018 E-House (China) Enterprise Holdings had CN¥1.00b of debt, an increase on CN¥450.0m, over one year. But it also has CN¥2.96b in cash to offset that, meaning it has CN¥1.96b net cash.
How Strong Is E-House (China) Enterprise Holdings's Balance Sheet?
We can see from the most recent balance sheet that E-House (China) Enterprise Holdings had liabilities of CN¥3.80b falling due within a year, and liabilities of CN¥73.0k due beyond that. Offsetting these obligations, it had cash of CN¥2.96b as well as receivables valued at CN¥7.52b due within 12 months. So it can boast CN¥6.68b more liquid assets than total liabilities.
This excess liquidity is a great indication that E-House (China) Enterprise 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, E-House (China) Enterprise Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that E-House (China) Enterprise Holdings has boosted its EBIT by 46%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine E-House (China) Enterprise Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.