Is Champion Alliance International Holdings (HKG:1629) using too much debt?
David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Above all, Champion Alliance International Holdings Limited (HKG:1629) is in debt. But should shareholders worry about its use of debt?
What risk does debt carry?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth 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 Champion Alliance International Holdings
What is the net debt of Champion Alliance International Holdings?
The graph below, which you can click on for more details, shows that Champion Alliance International Holdings had a debt of 41.6 million Canadian yen in June 2022; about the same as the previous year. However, his balance sheet shows that he holds 95.3 million yen in cash, so he actually has a net cash of 53.6 million yen.
How strong is Champion Alliance International Holdings’ balance sheet?
We can see from the most recent balance sheet that Champion Alliance International Holdings had liabilities of 214.7 million yen due within one year, and liabilities of 52.9 million yen due beyond. In compensation for these obligations, it had cash of 95.3 million yen as well as receivables valued at 45.3 million yen due within 12 months. It therefore has liabilities totaling 127.1 million Canadian yen more than its cash and short-term receivables, combined.
This is a mountain of leverage compared to its market capitalization of 142.3 million Canadian yen. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet quickly. Despite its notable liabilities, Champion Alliance International Holdings has net cash, so it’s fair to say that it doesn’t have heavy debt!
Importantly, Champion Alliance International Holdings’ EBIT has fallen 77% over the last twelve months. If this decline continues, it will be more difficult to repay debts than to sell foie gras at a vegan convention. The balance sheet is clearly the area to focus on when analyzing debt. But it is the profits of Champion Alliance International Holdings that will influence the balance sheet in the future. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.
Finally, while the taxman may love accounting profits, lenders only accept cash. Although Champion Alliance International Holdings has net cash on its balance sheet, it is always worth looking at its ability to convert earnings before interest and taxes (EBIT) to free cash flow, to help us understand how quickly it builds (or erodes) this cash balance. Fortunately for all shareholders, Champion Alliance International Holdings has actually produced more free cash flow than EBIT for the past three years. There’s nothing better than incoming money to stay in the good books of your lenders.
Although Champion Alliance International Holdings’ balance sheet is not particularly strong, due to total liabilities, it is clearly positive to see that it has a net cash position of 53.6 million yen. And it impressed us with a free cash flow of 71 million Canadian yen, or 439% of its EBIT. So even if Champion Alliance International Holdings doesn’t have a great track record, it’s certainly not that bad. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example – Champion Alliance International Holdings has 3 warning signs we think you should know.
If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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