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

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Anchorstone Holdings Limited (HKG:1592) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Anchorstone Holdings

What Is Anchorstone Holdings's Debt?

As you can see below, Anchorstone Holdings had HK$119.5m of debt at June 2022, down from HK$136.2m a year prior. And it doesn't have much cash, so its net debt is about the same.

How Strong Is Anchorstone Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Anchorstone Holdings had liabilities of HK$110.8m due within 12 months and liabilities of HK$81.0m due beyond that. Offsetting these obligations, it had cash of HK$923.0k as well as receivables valued at HK$198.8m due within 12 months. So it can boast HK$7.81m more liquid assets than total liabilities.

This surplus suggests that Anchorstone Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Anchorstone Holdings made a loss at the EBIT level, and saw its revenue drop to HK$95m, which is a fall of 23%. 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 a very considerable HK$41m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. 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. For example Anchorstone Holdings has 5 warning signs (and 1 which is significant) we think you should know about.

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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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.