Does Asia Allied Infrastructure Holdings (HKG:711) Have A Healthy Balance Sheet?

Simply Wall St
February 01, 2021
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Warren Buffett famously said, '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, Asia Allied Infrastructure Holdings Limited (HKG:711) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Asia Allied Infrastructure Holdings

How Much Debt Does Asia Allied Infrastructure Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Asia Allied Infrastructure Holdings had HK$2.72b of debt in September 2020, down from HK$2.90b, one year before. However, because it has a cash reserve of HK$1.34b, its net debt is less, at about HK$1.37b.

SEHK:711 Debt to Equity History February 2nd 2021

A Look At Asia Allied Infrastructure Holdings' Liabilities

The latest balance sheet data shows that Asia Allied Infrastructure Holdings had liabilities of HK$4.50b due within a year, and liabilities of HK$1.27b falling due after that. On the other hand, it had cash of HK$1.34b and HK$4.43b worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Asia Allied Infrastructure Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the HK$1.09b company is short on cash, but still worth keeping an eye on the balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Asia Allied Infrastructure Holdings will need earnings to service that debt. 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 Asia Allied Infrastructure Holdings had a loss before interest and tax, and actually shrunk its revenue by 8.6%, to HK$8.0b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Asia Allied Infrastructure Holdings produced an earnings before interest and tax (EBIT) loss. Indeed, it lost HK$35m 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. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. This one is a bit too risky for our liking. 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 Asia Allied Infrastructure Holdings has 5 warning signs (and 2 which make us uncomfortable) 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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