CK Asset Holdings (HKG: 1113) takes risks with its use of debt
When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We note that CK Asset Holdings Limited (HKG: 1113) has debt on its balance sheet. But should shareholders be concerned about its use of debt?
Why Does Debt Bring Risk?
Debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers.
However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, many companies use debt to finance their growth without negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
What is the debt of CK Asset Holdings?
CK Asset Holdings had debt of HK $ 93.2 billion, up from HK $ 76.7 billion a year ago. Click on the image for more details. On the other hand, he has HK $ 42.9 billion in cash, resulting in net debt of around HK $ 50.3 billion.
How healthy is CK Asset Holdings’ balance sheet?
CK Asset Holdings had liabilities of HK $ 69.5 billion due within 12 months and liabilities of HK $ 96.6 billion due beyond 12 months. In return, he had HK $ 42.9 billion in cash and HK $ 11.4 billion in receivables due within 12 months. It therefore has liabilities totaling HK $ 111.8 billion more than its cash and short-term receivables combined.
This shortfall is sizable compared to its very large market capitalization of HK $ 168.2 billion, so he suggests shareholders keep an eye on CK Asset Holdings’ use of debt. If its lenders asked it to consolidate the balance sheet, shareholders would likely face severe dilution.
We measure a company’s debt load relative to its earning capacity by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
CK Asset Holdings’ net debt to EBITDA ratio of around 1.9 suggests only a moderate use of debt. And its high interest coverage of 1k times, makes us even more comfortable. The bad news is that CK Asset Holdings has seen its EBIT drop 19% over the past year. If incomes continue to drop at this rate, it will be more difficult to manage debt than taking three kids under 5 to a fancy pants restaurant.
There is no doubt that we learn the most about debt from the balance sheet. But it is future earnings, more than anything, that will determine CK Asset Holdings’ ability to maintain a healthy balance sheet going forward.
Finally, a business can only pay off its debts with hard cash, not with book profits. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, CK Asset Holdings has recorded free cash flow of 76% of its EBIT, which is close to normal given that free cash flow excludes interest and taxes. This hard cash allows him to reduce his debt whenever he wants.
Looking at all the factors mentioned above, CK Asset Holdings is a somewhat risky investment because of its debt. However, not all risks are bad, as they can increase stock returns if they are profitable, but this risk of leverage is worth keeping in mind. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet.
Comment below if you guys think it's worth investing in it.
If you wish to leverage on this consider using DLCs
$CK ASSET (01113.HK)$
5x short $CKAsset 5xShortSG231019 (DIBW.SG)$
5x long $CKAsset 5xLongSG231019 (DJHW.SG)$
Why Does Debt Bring Risk?
Debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers.
However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, many companies use debt to finance their growth without negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
What is the debt of CK Asset Holdings?
CK Asset Holdings had debt of HK $ 93.2 billion, up from HK $ 76.7 billion a year ago. Click on the image for more details. On the other hand, he has HK $ 42.9 billion in cash, resulting in net debt of around HK $ 50.3 billion.
How healthy is CK Asset Holdings’ balance sheet?
CK Asset Holdings had liabilities of HK $ 69.5 billion due within 12 months and liabilities of HK $ 96.6 billion due beyond 12 months. In return, he had HK $ 42.9 billion in cash and HK $ 11.4 billion in receivables due within 12 months. It therefore has liabilities totaling HK $ 111.8 billion more than its cash and short-term receivables combined.
This shortfall is sizable compared to its very large market capitalization of HK $ 168.2 billion, so he suggests shareholders keep an eye on CK Asset Holdings’ use of debt. If its lenders asked it to consolidate the balance sheet, shareholders would likely face severe dilution.
We measure a company’s debt load relative to its earning capacity by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
CK Asset Holdings’ net debt to EBITDA ratio of around 1.9 suggests only a moderate use of debt. And its high interest coverage of 1k times, makes us even more comfortable. The bad news is that CK Asset Holdings has seen its EBIT drop 19% over the past year. If incomes continue to drop at this rate, it will be more difficult to manage debt than taking three kids under 5 to a fancy pants restaurant.
There is no doubt that we learn the most about debt from the balance sheet. But it is future earnings, more than anything, that will determine CK Asset Holdings’ ability to maintain a healthy balance sheet going forward.
Finally, a business can only pay off its debts with hard cash, not with book profits. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, CK Asset Holdings has recorded free cash flow of 76% of its EBIT, which is close to normal given that free cash flow excludes interest and taxes. This hard cash allows him to reduce his debt whenever he wants.
Looking at all the factors mentioned above, CK Asset Holdings is a somewhat risky investment because of its debt. However, not all risks are bad, as they can increase stock returns if they are profitable, but this risk of leverage is worth keeping in mind. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet.
Comment below if you guys think it's worth investing in it.
If you wish to leverage on this consider using DLCs
$CK ASSET (01113.HK)$
5x short $CKAsset 5xShortSG231019 (DIBW.SG)$
5x long $CKAsset 5xLongSG231019 (DJHW.SG)$
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