Does APAC Resources (HKG:1104) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 note that APAC Resources Limited (HKG:1104) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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What Risk Does Debt Bring?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does APAC Resources Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 APAC Resources had HK$578.8m of debt, an increase on HK$88.0m, over one year. But it also has HK$2.28b in cash to offset that, meaning it has HK$1.70b net cash.

How Healthy Is APAC Resources' Balance Sheet?

According to the last reported balance sheet, APAC Resources had liabilities of HK$670.6m due within 12 months, and liabilities of HK$2.31m due beyond 12 months. Offsetting these obligations, it had cash of HK$2.28b as well as receivables valued at HK$103.5m due within 12 months. So it actually has HK$1.71b more liquid assets than total liabilities.

This surplus strongly suggests that APAC Resources has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, APAC Resources boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is APAC Resources's earnings that will influence how the balance sheet holds up in the future. 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.

See our latest analysis for APAC Resources

In the last year APAC Resources had a loss before interest and tax, and actually shrunk its revenue by 69%, to HK$395m. To be frank that doesn't bode well.

So How Risky Is APAC Resources?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that APAC Resources had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through HK$714m of cash and made a loss of HK$513m. But the saving grace is the HK$1.70b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for APAC Resources that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.