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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, CK Hutchison Holdings Limited (HKG:1) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does CK Hutchison Holdings Carry?
You can click the graphic below for the historical numbers, but it shows that CK Hutchison Holdings had HK$276.7b of debt in December 2023, down from HK$288.3b, one year before. However, because it has a cash reserve of HK$127.3b, its net debt is less, at about HK$149.4b.
SEHK:1 Debt to Equity History June 25th 2024
A Look At CK Hutchison Holdings' Liabilities
Zooming in on the latest balance sheet data, we can see that CK Hutchison Holdings had liabilities of HK$162.5b due within 12 months and liabilities of HK$325.8b due beyond that. Offsetting these obligations, it had cash of HK$127.3b as well as receivables valued at HK$33.7b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$327.4b.
The deficiency here weighs heavily on the HK$140.0b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, CK Hutchison Holdings would likely require a major re-capitalisation if it had to pay its creditors today.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
While we wouldn't worry about CK Hutchison Holdings's net debt to EBITDA ratio of 3.0, we think its super-low interest cover of 2.3 times is a sign of high leverage. So shareholders should probably be aware that interest expenses appear to have really impacted the business lately. Fortunately, CK Hutchison Holdings grew its EBIT by 7.5% in the last year, slowly shrinking its debt relative to earnings. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if CK Hutchison Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. During the last three years, CK Hutchison Holdings generated free cash flow amounting to a very robust 81% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.
Our View
We'd go so far as to say CK Hutchison Holdings's level of total liabilities was disappointing. But on the bright side, its conversion of EBIT to free cash flow is a good sign, and makes us more optimistic. Looking at the balance sheet and taking into account all these factors, we do believe that debt is making CK Hutchison Holdings stock a bit risky. That's not necessarily a bad thing, but we'd generally feel more comfortable with less leverage. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for CK Hutchison Holdings you should know about.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
CK Hutchison Holdingsの負債を見てみましょう。最新の貸借対照表データを詳しく調べると、CK Hutchison Holdingsが12か月以内に1625億香港ドル、それ以上に3258億香港ドルの負債を抱えていることがわかります。これらの負債に対して、CK Hutchison Holdingsが持つ現金1273億香港ドルと、12か月以内に回収予定の337億香港ドルの債権があります。つまり、負債は、現金と短期債権の合計を3274億香港ドルオーバーします。
CK Hutchison Holdingsが持つ負債の総額が大きすぎるため、同社には大きなリスクがあると言えます。これは、荷物の詰まったバックパック、スポーツの道具、そしてトランペットを詰め込んだ重量のある子供が、苦しみに苦しんでいる場合と同様です。つまり、CK Hutchison Holdingsは、貸し手に今すぐ返済する必要がある場合、大規模な資本再編が必要になる可能性があります。
CK Hutchison Holdingsの純債務/EBITDA比率が3.0であり、超低い利息カバー倍率の2.3倍であることは、そのレバレッジが高いことを示しています。これにより、利息負担が最近のビジネスに深刻な影響を与えたことが明らかになります。幸いなことに、CK Hutchison Holdingsは、昨年度にEBITを7.5%増加させ、収益に対する債務を徐々に減らしています。バランスシートは、債務分析を行う際に重要な領域であり、CK Hutchison Holdingsが時間をかけてバランスシートを強化できるかどうかを決定するのは、最終的にビジネスの将来的な収益性です。専門家の意見を知りたい場合、アナリストの利益予測に関するこの無料レポートが興味深いかもしれません。
オーストラリアでは、moomooの投資商品及びサービスはMoomoo Securities Australia Limitedによって提供され、オーストラリア証券投資委員会(ASIC)の管理を受けております(AFSL No. 224663)。「金融サービスガイド」、「利用規約」、「プライバシーポリシー」などの詳細は、Moomoo Securities Australia Limitedのウェブサイトhttps://www.moomoo.com/auでご確認いただけます。
オーストラリアでは、moomooの投資商品及びサービスはMoomoo Securities Australia Limitedによって提供され、オーストラリア証券投資委員会(ASIC)の管理を受けております(AFSL No. 224663)。「金融サービスガイド」、「利用規約」、「プライバシーポリシー」などの詳細は、Moomoo Securities Australia Limitedのウェブサイトhttps://www.moomoo.com/auでご確認いただけます。