AUX International Holdings (HKG:2080) Has A Rock Solid 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 can see that AUX International Holdings Limited (HKG:2080) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for AUX International Holdings

What Is AUX International Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that AUX International Holdings had debt of HK$85.3m at the end of March 2021, a reduction from HK$109.2m over a year. But it also has HK$248.1m in cash to offset that, meaning it has HK$162.8m net cash.

How Healthy Is AUX International Holdings' Balance Sheet?

The latest balance sheet data shows that AUX International Holdings had liabilities of HK$202.4m due within a year, and liabilities of HK$109.2m falling due after that. Offsetting these obligations, it had cash of HK$248.1m as well as receivables valued at HK$72.3m due within 12 months. So it can boast HK$8.86m 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.

On top of that, AUX International Holdings grew its EBIT by 70% over the last twelve months, and that growth will make it easier to handle its debt. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While AUX International Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, AUX International Holdings actually produced more free cash flow than EBIT over the last two years. 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$162.8m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 178% of that EBIT to free cash flow, bringing in HK$46m. 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. For example - AUX International Holdings has 2 warning signs we think you should be aware of.

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.
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