Does Ajisen (China) Holdings (HKG:538) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Ajisen (China) Holdings Limited (HKG:538) does use debt in its business. But the more important question is: how much risk is that debt creating?

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

Check out our latest analysis for Ajisen (China) Holdings

What Is Ajisen (China) Holdings's Debt?

As you can see below, Ajisen (China) Holdings had CN¥207.8m of debt at December 2020, down from CN¥247.5m a year prior. However, it does have CN¥1.74b in cash offsetting this, leading to net cash of CN¥1.53b.

How Strong Is Ajisen (China) Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ajisen (China) Holdings had liabilities of CN¥739.6m due within 12 months and liabilities of CN¥642.0m due beyond that. Offsetting this, it had CN¥1.74b in cash and CN¥58.0m in receivables that were due within 12 months. So it can boast CN¥414.9m more liquid assets than total liabilities.

This surplus strongly suggests that Ajisen (China) Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Ajisen (China) Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Ajisen (China) Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Ajisen (China) Holdings had a loss before interest and tax, and actually shrunk its revenue by 29%, to CN¥1.8b. To be frank that doesn't bode well.

So How Risky Is Ajisen (China) Holdings?

Although Ajisen (China) Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥280m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. To that end, you should learn about the 2 warning signs we've spotted with Ajisen (China) Holdings (including 1 which makes us a bit uncomfortable) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.
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