AMCO United Holding (HKG:630) Seems To Use Debt Quite Sensibly

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.' 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. As with many other companies AMCO United Holding Limited (HKG:630) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 AMCO United Holding

How Much Debt Does AMCO United Holding Carry?

The chart below, which you can click on for greater detail, shows that AMCO United Holding had HK$30.9m in debt in June 2024; about the same as the year before. However, it does have HK$35.1m in cash offsetting this, leading to net cash of HK$4.18m.

How Healthy Is AMCO United Holding's Balance Sheet?

The latest balance sheet data shows that AMCO United Holding had liabilities of HK$66.7m due within a year, and liabilities of HK$30.9m falling due after that. Offsetting these obligations, it had cash of HK$35.1m as well as receivables valued at HK$89.4m due within 12 months. So it can boast HK$26.9m more liquid assets than total liabilities.

This excess liquidity is a great indication that AMCO United Holding's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, AMCO United Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

Although AMCO United Holding made a loss at the EBIT level, last year, it was also good to see that it generated HK$15m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is AMCO United Holding's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. AMCO United Holding may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, AMCO United Holding saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case AMCO United Holding has HK$4.18m in net cash and a decent-looking balance sheet. So we are not troubled with AMCO United Holding's debt use. 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, we've discovered 4 warning signs for AMCO United Holding (2 are a bit unpleasant!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.