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These 4 Measures Indicate That Chuan Hup Holdings (SGX:C33) Is Using Debt Safely

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 can see that Chuan Hup Holdings Limited (SGX:C33) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Chuan Hup Holdings

What Is Chuan Hup Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Chuan Hup Holdings had US$68.0k of debt in March 2019, down from US$7.71m, one year before. However, it does have US$132.7m in cash offsetting this, leading to net cash of US$132.7m.

SGX:C33 Historical Debt, August 27th 2019
SGX:C33 Historical Debt, August 27th 2019

A Look At Chuan Hup Holdings's Liabilities

The latest balance sheet data shows that Chuan Hup Holdings had liabilities of US$70.0m due within a year, and liabilities of US$1.68m falling due after that. Offsetting these obligations, it had cash of US$132.7m as well as receivables valued at US$64.9m due within 12 months. So it actually has US$126.0m more liquid assets than total liabilities.

This excess liquidity is a great indication that Chuan Hup 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, Chuan Hup Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Chuan Hup Holdings's load is not too heavy, because its EBIT was down 31% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Chuan Hup Holdings 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Chuan Hup Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Chuan Hup Holdings recorded free cash flow worth a fulsome 92% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Chuan Hup Holdings has US$133m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 92% of that EBIT to free cash flow, bringing in US$28m. So is Chuan Hup Holdings's debt a risk? It doesn't seem so to us. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Chuan Hup Holdings's dividend history, without delay!

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.

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