Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital.” It is only natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. We can see that Amber Hill Financial Holdings Limited (HKG: 33) uses debt in his business. But should shareholders be concerned about its use of debt?
What risk does debt entail?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. If things really go wrong, lenders can take over the business. 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. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we look at debt levels, we first look at cash and debt levels, together.
Check out our latest analysis for Amber Hill Financial Holdings
What is Amber Hill Financial Holdings’ net debt?
As you can see below, Amber Hill Financial Holdings had a debt of HK $ 157.5 million in June 2021, up from HK $ 219.5 million the year before. However, his balance sheet shows that he has HK $ 249.0million in cash, so he actually has HK $ 91.5million in net cash.
How strong is Amber Hill Financial Holdings’ balance sheet?
The latest balance sheet data shows Amber Hill Financial Holdings had HK $ 244.2 million liabilities due within one year, and HK $ 1.43 million liabilities due after that. In compensation for these obligations, he had cash of HK $ 249.0 million as well as receivables valued at HK $ 109.0 million due within 12 months. He can therefore boast of having HK $ 112.3 million more in liquid assets than total Liabilities.
This short-term liquidity is a sign that Amber Hill Financial Holdings could likely repay its debt with ease, as its balance sheet is far from tight. Put simply, the fact that Amber Hill Financial Holdings has more cash than debt is arguably a good indication that it can safely manage its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in isolation; given that Amber Hill Financial Holdings will need revenue to repay this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Year-over-year, Amber Hill Financial Holdings reported HK $ 226 million in revenue, a 162% gain, although it reported no profit before interest and taxes. So there is no doubt that shareholders are encouraging growth
So how risky is Amber Hill Financial Holdings?
Statistically speaking, businesses that lose money are riskier than those that earn it. And over the past year, Amber Hill Financial Holdings has recorded a loss of earnings before interest and taxes (EBIT), frankly. And during the same period, it recorded a negative free cash outflow of HK $ 81 million and recorded a book loss of HK $ 42 million. With only HK $ 91.5 million on the balance sheet, it looks like it will soon have to raise capital again. It is important to note that the revenue growth of Amber Hill Financial Holdings is very promising. High growth nonprofits can be risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. We have identified 4 warning signs with Amber Hill Financial Holdings (at least 2 of which are a little worrying), and understanding them should be part of your investment process.
At the end of the day, it’s often best to focus on businesses that don’t have net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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 does not have any 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.