Does Asia Cement (China) Holdings (HKG:743) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes no bones about it when he says ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’ So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Asia Cement (China) Holdings Corporation (HKG:743) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 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. 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 step when considering a company’s debt levels is to consider its cash and debt together.

Check out our latest analysis for Asia Cement (China) Holdings

How Much Debt Does Asia Cement (China) Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Asia Cement (China) Holdings had CN¥2.56b of debt in September 2022, down from CN¥2.77b, one year before. However, it does have CN¥8.85b in cash offsetting this, leading to net cash of CN¥6.29b.

How Strong Is Asia Cement (China) Holdings’ Balance Sheet?

According to the last reported balance sheet, Asia Cement (China) Holdings had liabilities of CN¥2.46b due within 12 months, and liabilities of CN¥1.55b due beyond 12 months. On the other hand, it had cash of CN¥8.85b and CN¥1.46b worth of receivables due within a year. So it actually has CN¥6.29b more liquid assets than total liabilities.

This excess liquidity is a great indication that Asia Cement (China) Holdings’ balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Asia Cement (China) Holdings boasts net cash, so it’s fair to say it does not have a heavy debt load!

In fact Asia Cement (China) Holdings’s saving grace is its low debt levels, because its EBIT has tanked 60% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Asia Cement (China) 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Asia Cement (China) Holdings has net cash on its balance sheet, it’s still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Asia Cement (China) Holdings actually produced more free cash flow than EBIT. There’s nothing better than incoming cash when it comes to staying in your lenders’ good graces.

Summing Up

While it is always sensible to investigate a company’s debt, in this case Asia Cement (China) Holdings has CN¥6.29b in net cash and a strong balance sheet. The cherry on top was that in converted 114% of that EBIT to free cash flow, bringing in CN¥1.7b. So we don’t think Asia Cement (China) Holdings’s use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We’ve identified 2 warning signs with Asia Cement (China) Holdings , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.