AUX International Holdings (HKG:2080) Could Easily Take On More Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that AUX International Holdings Limited (HKG:2080) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for AUX International Holdings

How Much Debt Does AUX International Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that AUX International Holdings had HK$81.8m of debt in September 2020, down from HK$109.9m, one year before. But on the other hand it also has HK$214.4m in cash, leading to a HK$132.6m net cash position.

How Healthy Is AUX International Holdings' Balance Sheet?

We can see from the most recent balance sheet that AUX International Holdings had liabilities of HK$187.8m falling due within a year, and liabilities of HK$96.3m due beyond that. Offsetting these obligations, it had cash of HK$214.4m as well as receivables valued at HK$80.3m due within 12 months. So it actually has HK$10.6m more liquid assets than total liabilities.

This short term liquidity is a sign that AUX International Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that AUX International Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that AUX International Holdings grew its EBIT by 12% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is AUX International Holdings'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. AUX International Holdings 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. Over the last two years, AUX International Holdings actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case AUX International Holdings has HK$132.6m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of HK$23m, being 185% of its EBIT. So we don't think AUX International Holdings's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for AUX International Holdings you should be aware of.

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.

If you’re looking to trade AUX International Holdings, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.