Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Chervon Holdings Limited (HKG:2285) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Chervon Holdings
What Is Chervon Holdings's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2024 Chervon Holdings had debt of US$329.0m, up from US$255.2m in one year. But on the other hand it also has US$387.1m in cash, leading to a US$58.1m net cash position.
How Strong Is Chervon Holdings' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Chervon Holdings had liabilities of US$819.4m due within 12 months and liabilities of US$138.6m due beyond that. Offsetting these obligations, it had cash of US$387.1m as well as receivables valued at US$469.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$101.2m.
Given Chervon Holdings has a market capitalization of US$1.15b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Chervon Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Chervon Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Chervon Holdings made a loss at the EBIT level, and saw its revenue drop to US$1.5b, which is a fall of 16%. We would much prefer see growth.
So How Risky Is Chervon Holdings?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Chervon Holdings had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$32m and booked a US$25m accounting loss. Given it only has net cash of US$58.1m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. For riskier companies like Chervon Holdings I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.