Health Check: How Prudently Does Ajisen (China) Holdings (HKG:538) Use 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.' 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. As with many other companies Ajisen (China) Holdings Limited (HKG:538) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Ajisen (China) Holdings

What Is Ajisen (China) Holdings's Net Debt?

As you can see below, Ajisen (China) Holdings had CN¥79.3m of debt at June 2022, down from CN¥190.3m a year prior. But it also has CN¥1.53b in cash to offset that, meaning it has CN¥1.45b net cash.

A Look At Ajisen (China) Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Ajisen (China) Holdings had liabilities of CN¥652.7m due within 12 months and liabilities of CN¥548.9m due beyond that. Offsetting this, it had CN¥1.53b in cash and CN¥37.5m in receivables that were due within 12 months. So it actually has CN¥364.0m 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 ultimately the future profitability of the business will decide if Ajisen (China) Holdings can strengthen its balance sheet over time. 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 22%, to CN¥1.7b. That makes us nervous, to say the least.

So How Risky Is Ajisen (China) Holdings?

While Ajisen (China) Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥213m. 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. The next few years will be important as the business matures. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Ajisen (China) Holdings 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.

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

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.