Allan International Holdings (HKG:684) Has Debt But No Earnings; Should You Worry?

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.' 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. We can see that Allan International Holdings Limited (HKG:684) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Allan International Holdings

What Is Allan International Holdings's Debt?

As you can see below, Allan International Holdings had HK$15.8m of debt at March 2023, down from HK$20.9m a year prior. However, its balance sheet shows it holds HK$563.1m in cash, so it actually has HK$547.3m net cash.

How Healthy Is Allan International Holdings' Balance Sheet?

We can see from the most recent balance sheet that Allan International Holdings had liabilities of HK$194.0m falling due within a year, and liabilities of HK$47.5m due beyond that. Offsetting these obligations, it had cash of HK$563.1m as well as receivables valued at HK$97.5m due within 12 months. So it can boast HK$419.1m more liquid assets than total liabilities.

This surplus strongly suggests that Allan International Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Allan International Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Allan International Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Allan International Holdings had a loss before interest and tax, and actually shrunk its revenue by 47%, to HK$413m. To be frank that doesn't bode well.

So How Risky Is Allan International Holdings?

While Allan International Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$52m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too 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. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Allan International Holdings (of which 1 is potentially serious!) 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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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.