Able Engineering Holdings (HKG:1627) Has A Pretty Healthy Balance Sheet

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. 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. Importantly, Able Engineering Holdings Limited (HKG:1627) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Able Engineering Holdings

How Much Debt Does Able Engineering Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Able Engineering Holdings had HK$377.0k of debt in March 2019, down from HK$7.31m, one year before. But it also has HK$905.3m in cash to offset that, meaning it has HK$905.0m net cash.

How Strong Is Able Engineering Holdings's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Able Engineering Holdings had liabilities of HK$732.8m due within 12 months and no liabilities due beyond that. On the other hand, it had cash of HK$905.3m and HK$330.4m worth of receivables due within a year. So it actually has HK$502.9m more liquid assets than total liabilities.

This luscious liquidity implies that Able Engineering Holdings's balance sheet is sturdy like a giant sequoia tree. On this view, it seems its balance sheet is as strong as a black-belt karate master. Simply put, the fact that Able Engineering Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Able Engineering Holdings if management cannot prevent a repeat of the 24% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is Able Engineering 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Able Engineering Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Able Engineering Holdings's free cash flow amounted to 24% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Able Engineering Holdings has HK$905.0m in net cash and a decent-looking balance sheet. So we don't have any problem with Able Engineering Holdings's use of debt. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Able Engineering Holdings's dividend history, without delay!

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.