Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that AP Rentals Holdings Limited (HKG:1496) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is AP Rentals Holdings's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2021 AP Rentals Holdings had HK$21.6m of debt, an increase on HK$19.4m, over one year. However, it does have HK$60.1m in cash offsetting this, leading to net cash of HK$38.4m.
How Healthy Is AP Rentals Holdings' Balance Sheet?
We can see from the most recent balance sheet that AP Rentals Holdings had liabilities of HK$62.8m falling due within a year, and liabilities of HK$29.9m due beyond that. Offsetting this, it had HK$60.1m in cash and HK$30.2m in receivables that were due within 12 months. So its liabilities total HK$2.39m more than the combination of its cash and short-term receivables.
Having regard to AP Rentals Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the HK$127.0m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, AP Rentals Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is AP Rentals Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year AP Rentals Holdings's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.
So How Risky Is AP Rentals Holdings?
While AP Rentals Holdings lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of HK$359k. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for AP Rentals Holdings (of which 1 is concerning!) you should know about.
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.