EEKA Fashion Holdings (HKG: 3709) has a rock solid balance sheet
David Iben put it well when he said: “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ 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. Like many other companies EEKA Fashion Holdings Limited (HKG: 3709) uses debt. But the most important question is: what risk does this debt create?
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
See our latest analysis for EEKA Fashion Holdings
What is the debt of EEKA Fashion Holdings?
As you can see below, EEKA Fashion Holdings had a debt of CN 452.3 million in June 2021, compared to CN 540.8 million the previous year. However, his balance sheet shows that he has CN 1.22 billion in cash, so he actually has a net cash position of CN 762.9 million.
How strong is EEKA Fashion Holdings’ balance sheet?
According to the latest published balance sheet, EEKA Fashion Holdings had liabilities of CN 1.73 billion due within 12 months and liabilities of CN 431.3 million due beyond 12 months. On the other hand, he had CN 1.22 billion in cash and CN 505.1 million in receivables due within one year. It therefore has liabilities totaling CN 445.2 million more than its cash and short-term receivables combined.
Considering that the publicly traded shares of EEKA Fashion Holdings are worth a total of 5.98 billion yuan, it seems unlikely that this level of liabilities is a major threat. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time. Despite its notable liabilities, EEKA Fashion Holdings has a net cash flow, so it’s fair to say that it doesn’t have a lot of debt!
On top of that, EEKA Fashion Holdings has increased its EBIT by 63% over the past twelve months, and this growth will make it easier to process its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future profits, more than anything, that will determine EEKA Fashion Holdings’ ability to maintain a healthy balance sheet going forward. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business needs free cash flow to repay its debts; accounting profits are not enough. Although EEKA Fashion Holdings has net cash on its balance sheet, it is still worth examining its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how quickly it is. is building (or eroding) cash balance. Fortunately for all shareholders, EEKA Fashion Holdings has actually generated more free cash flow than EBIT over the past three years. This kind of solid money conversion makes us as excited as the crowd when the beat drops at a Daft Punk concert.
While it is always a good idea to look at the total liabilities of a business, it is very reassuring that EEKA Fashion Holdings has CN 762.9 million in net cash. The icing on the cake was that he converted 193% of that EBIT into free cash flow, which brought in NC 1.4 billion. We therefore do not believe that the use of debt by EEKA Fashion Holdings is risky. 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. To do this, you need to know the 1 warning sign we spotted with EEKA Fashion Holdings.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.