Able Engineering Holdings (HKG:1627) Has Debt But No Earnings; Should You Worry?

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.' 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. As with many other companies Able Engineering Holdings Limited (HKG:1627) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Able Engineering Holdings

What Is Able Engineering Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Able Engineering Holdings had HK$256.8m of debt, an increase on HK$2.64m, over one year. However, its balance sheet shows it holds HK$725.0m in cash, so it actually has HK$468.2m net cash.

How Healthy Is Able Engineering Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Able Engineering Holdings had liabilities of HK$853.5m due within 12 months and liabilities of HK$18.3m due beyond that. Offsetting these obligations, it had cash of HK$725.0m as well as receivables valued at HK$529.7m due within 12 months. So it can boast HK$382.9m more liquid assets than total liabilities.

This surplus liquidity suggests that Able Engineering Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. 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. When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year Able Engineering Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 37%, to HK$2.3b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Able Engineering Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Able Engineering Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through HK$134m of cash and made a loss of HK$54m. Given it only has net cash of HK$468.2m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Able Engineering Holdings may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Able Engineering Holdings , and understanding them should be part of your investment process.

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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