Does Amax International Holdings (HKG:959) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Amax International Holdings Limited (HKG:959) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Amax International Holdings

What Is Amax International Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Amax International Holdings had HK$95.5m of debt in March 2019, down from HK$213.6m, one year before. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is Amax International Holdings's Balance Sheet?

The latest balance sheet data shows that Amax International Holdings had liabilities of HK$60.3m due within a year, and liabilities of HK$53.7m falling due after that. Offsetting these obligations, it had cash of HK$1.20m as well as receivables valued at HK$38.3m due within 12 months. So it has liabilities totalling HK$74.4m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of HK$96.2m, so it does suggest shareholders should keep an eye on Amax International Holdings's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Amax International Holdings 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, Amax International Holdings reported revenue of HK$71m, which is a gain of 14%. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Amax International Holdings had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost a very considerable HK$27m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled HK$9.2m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. For riskier companies like Amax International Holdings I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.