David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 can see that Amax International Holdings Limited (HKG:959) does use debt in its business. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Amax International Holdings's Debt?
The image below, which you can click on for greater detail, shows that Amax International Holdings had debt of HK$95.5m at the end of March 2019, a reduction from HK$213.6m over a year. Net debt is about the same, since the it doesn't have much cash.
How Healthy Is Amax International Holdings's Balance Sheet?
The latest balance sheet data shows that Amax International Holdings had liabilities of HK$60.3m due within a year, and liabilities of HK$53.7m falling due after that. Offsetting these obligations, it had cash of HK$1.20m as well as receivables valued at HK$38.3m due within 12 months. So it has liabilities totalling HK$74.4m more than its cash and near-term receivables, combined.
This deficit is considerable relative to its market capitalization of HK$103.9m, so it does suggest shareholders should keep an eye on Amax International Holdings's use of debt. This suggests shareholders would heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Amax International Holdings will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Amax International Holdings managed to grow its revenue by 14%, to HK$71m. We usually like to see faster growth from unprofitable companies, but each to their own.
Over the last twelve months Amax International Holdings produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping HK$27m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled HK$9.2m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. For riskier companies like Amax International Holdings I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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.
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