Would Allied Sustainability and Environmental Consultants Group (HKG:8320) Be Better Off With Less Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. 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?

Why Does Debt Bring Risk?

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. 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. When we think about a company's use of debt, we first look at 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?

The image below, which you can click on for greater detail, shows that at March 2023 Allied Sustainability and Environmental Consultants Group had debt of HK$15.2m, up from HK$11.5m in one year. However, it does have HK$12.9m in cash offsetting this, leading to net debt of about HK$2.27m.

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

According to the last reported balance sheet, Allied Sustainability and Environmental Consultants Group had liabilities of HK$20.8m due within 12 months, and liabilities of HK$3.84m due beyond 12 months. On the other hand, it had cash of HK$12.9m and HK$64.0m worth of receivables due within a year. So it actually has HK$52.2m more liquid assets than total liabilities.

This surplus liquidity suggests that Allied Sustainability and Environmental Consultants Group's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, Allied Sustainability and Environmental Consultants Group reported revenue of HK$46m, which is a gain of 4.2%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Allied Sustainability and Environmental Consultants Group produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at HK$5.1m. Having said that, the balance sheet has plenty of liquid assets for now. That should give the business time to grow its cashflow. While the stock is probably a bit risky, there may be an opportunity if the business itself improves, allowing the company to stage a recovery. 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. Be aware that Allied Sustainability and Environmental Consultants Group is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.