Is AL Group (HKG:8360) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies AL Group Limited (HKG:8360) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, plenty of companies use debt to fund growth, without any negative consequences. 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 AL Group

What Is AL Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that AL Group had HK$14.6m of debt in December 2021, down from HK$64.3m, one year before. However, its balance sheet shows it holds HK$28.0m in cash, so it actually has HK$13.4m net cash.

How Strong Is AL Group's Balance Sheet?

We can see from the most recent balance sheet that AL Group had liabilities of HK$55.0m falling due within a year, and liabilities of HK$8.74m due beyond that. Offsetting this, it had HK$28.0m in cash and HK$27.6m in receivables that were due within 12 months. So it has liabilities totalling HK$8.12m more than its cash and near-term receivables, combined.

Of course, AL Group has a market capitalization of HK$158.1m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, AL Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since AL Group 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.

Over 12 months, AL Group reported revenue of HK$111m, which is a gain of 64%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is AL Group?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year AL Group had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through HK$12m of cash and made a loss of HK$32m. However, it has net cash of HK$13.4m, so it has a bit of time before it will need more capital. AL Group's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for AL Group (2 are a bit concerning!) that you should be aware of before investing here.

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.

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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.