Allied Sustainability and Environmental Consultants Group (HKG:8320) Has A Pretty Healthy Balance Sheet

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Allied Sustainability and Environmental Consultants Group Limited (HKG:8320) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Allied Sustainability and Environmental Consultants Group

How Much Debt Does Allied Sustainability and Environmental Consultants Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Allied Sustainability and Environmental Consultants Group had HK$13.7m of debt, an increase on HK$8.50m, over one year. However, it does have HK$22.0m in cash offsetting this, leading to net cash of HK$8.25m.

How Healthy Is Allied Sustainability and Environmental Consultants Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Allied Sustainability and Environmental Consultants Group had liabilities of HK$19.8m due within 12 months and liabilities of HK$646.0k due beyond that. Offsetting this, it had HK$22.0m in cash and HK$56.4m in receivables that were due within 12 months. So it actually has HK$57.9m more liquid assets than total liabilities.

This excess liquidity is a great indication that Allied Sustainability and Environmental Consultants Group's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Allied Sustainability and Environmental Consultants Group boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Allied Sustainability and Environmental Consultants Group turned things around in the last 12 months, delivering and EBIT of HK$2.7m. There's no doubt that we learn most about debt from the balance sheet. But it is Allied Sustainability and Environmental Consultants Group'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Allied Sustainability and Environmental Consultants Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last year, Allied Sustainability and Environmental Consultants Group burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Allied Sustainability and Environmental Consultants Group has HK$8.25m in net cash and a strong balance sheet. So we don't have any problem with Allied Sustainability and Environmental Consultants Group's use of debt. 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. For example Allied Sustainability and Environmental Consultants Group has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.