Here's Why Fullwealth Construction Holdings (HKG:1034) Can Manage Its Debt Responsibly
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Fullwealth Construction Holdings Company Limited (HKG:1034) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Fullwealth Construction Holdings
What Is Fullwealth Construction Holdings's Debt?
As you can see below, at the end of June 2019, Fullwealth Construction Holdings had HK$29.8m of debt, up from HK$28.6m a year ago. Click the image for more detail. But on the other hand it also has HK$71.7m in cash, leading to a HK$41.9m net cash position.
A Look At Fullwealth Construction Holdings's Liabilities
Zooming in on the latest balance sheet data, we can see that Fullwealth Construction Holdings had liabilities of HK$106.3m due within 12 months and liabilities of HK$25.0m due beyond that. Offsetting these obligations, it had cash of HK$71.7m as well as receivables valued at HK$173.6m due within 12 months. So it actually has HK$114.0m more liquid assets than total liabilities.
This surplus liquidity suggests that Fullwealth Construction Holdings's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Simply put, the fact that Fullwealth Construction Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.
It is just as well that Fullwealth Construction Holdings's load is not too heavy, because its EBIT was down 67% over the last year. 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 Fullwealth Construction Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Fullwealth Construction 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, Fullwealth Construction Holdings saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Fullwealth Construction Holdings has net cash of HK$41.9m, as well as more liquid assets than liabilities. So we are not troubled with Fullwealth Construction Holdings's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Fullwealth Construction Holdings's earnings per share history for free.
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.
