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, AV Concept Holdings Limited (HKG:595) does carry debt. But the more important question is: how much risk is that debt creating?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
What Is AV Concept Holdings's Debt?
As you can see below, AV Concept Holdings had HK$72.4m of debt at March 2019, down from HK$136.6m a year prior. But on the other hand it also has HK$261.3m in cash, leading to a HK$188.9m net cash position.
How Strong Is AV Concept Holdings's Balance Sheet?
According to the last reported balance sheet, AV Concept Holdings had liabilities of HK$184.5m due within 12 months, and liabilities of HK$16.9m due beyond 12 months. On the other hand, it had cash of HK$261.3m and HK$71.1m worth of receivables due within a year. So it can boast HK$130.9m more liquid assets than total liabilities.
This excess liquidity is a great indication that AV Concept Holdings's balance sheet is just as strong as racists are weak. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Simply put, the fact that AV Concept Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. 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 AV Concept 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.
Over 12 months, AV Concept Holdings reported revenue of HK$1.7b, which is a gain of 2.2%. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is AV Concept Holdings?
Although AV Concept Holdings had negative earnings before interest and tax (EBIT) over the last twelve months, it made a statutory profit of HK$57m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. The next few years will be important as the business matures. For riskier companies like AV Concept Holdings I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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