Here's Why Anchorstone Holdings (HKG:1592) Can Afford Some Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Anchorstone Holdings Limited (HKG:1592) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Anchorstone Holdings

What Is Anchorstone Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Anchorstone Holdings had debt of HK$136.2m at the end of June 2021, a reduction from HK$175.4m over a year. However, because it has a cash reserve of HK$2.93m, its net debt is less, at about HK$133.3m.

How Strong Is Anchorstone Holdings' Balance Sheet?

The latest balance sheet data shows that Anchorstone Holdings had liabilities of HK$121.0m due within a year, and liabilities of HK$57.5m falling due after that. On the other hand, it had cash of HK$2.93m and HK$203.3m worth of receivables due within a year. So it can boast HK$27.8m more liquid assets than total liabilities.

This state of affairs indicates that Anchorstone Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the HK$2.29b company is struggling for cash, we still think it's worth monitoring its balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Anchorstone Holdings'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.

In the last year Anchorstone Holdings had a loss before interest and tax, and actually shrunk its revenue by 36%, to HK$123m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Anchorstone Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost HK$27m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. So it seems too risky for our taste. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Anchorstone Holdings (including 2 which can't be ignored) .

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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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.
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