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. 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. As with many other companies Riverine China Holdings Limited (HKG:1417) makes use of debt. But the real question is whether this debt is making the company risky.
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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is Riverine China Holdings's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Riverine China Holdings had CN¥35.0m of debt, an increase on CN¥10.0m, over one year. However, it does have CN¥146.4m in cash offsetting this, leading to net cash of CN¥111.4m.
How Healthy Is Riverine China Holdings's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Riverine China Holdings had liabilities of CN¥162.0m due within 12 months and no liabilities due beyond that. Offsetting this, it had CN¥146.4m in cash and CN¥107.0m in receivables that were due within 12 months. So it actually has CN¥91.3m more liquid assets than total liabilities.
This surplus suggests that Riverine China Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Riverine China Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
Riverine China Holdings's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. There's no doubt that we learn most about debt from the balance sheet. But it is Riverine China 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Riverine 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. During the last three years, Riverine China Holdings burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
While it is always sensible to investigate a company's debt, in this case Riverine China Holdings has CN¥111.4m in net cash and a decent-looking balance sheet. So we don't have any problem with Riverine China Holdings's use of debt. 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 Riverine China 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.
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