Is Allied Sustainability and Environmental Consultants Group (HKG:8320) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We note that Allied Sustainability and Environmental Consultants Group Limited (HKG:8320) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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

View our latest analysis for Allied Sustainability and Environmental Consultants Group

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

As you can see below, at the end of March 2021, Allied Sustainability and Environmental Consultants Group had HK$13.2m of debt, up from HK$12.1m a year ago. Click the image for more detail. But it also has HK$26.7m in cash to offset that, meaning it has HK$13.4m net cash.

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

We can see from the most recent balance sheet that Allied Sustainability and Environmental Consultants Group had liabilities of HK$18.8m falling due within a year, and liabilities of HK$1.35m due beyond that. Offsetting this, it had HK$26.7m in cash and HK$51.5m in receivables that were due within 12 months. So it actually has HK$58.0m more liquid assets than total liabilities.

This luscious liquidity implies that Allied Sustainability and Environmental Consultants Group's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. 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! 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 Allied Sustainability and Environmental Consultants Group 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 Allied Sustainability and Environmental Consultants Group wasn't profitable at an EBIT level, but managed to grow its revenue by 2.1%, to HK$42m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Allied Sustainability and Environmental Consultants Group?

While Allied Sustainability and Environmental Consultants Group lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of HK$1.2m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. There's no doubt the next few years will be crucial to how the business matures. 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. Be aware that Allied Sustainability and Environmental Consultants Group is showing 4 warning signs in our investment analysis , and 1 of those is significant...

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.
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