Does AMCO United Holding (HKG:630) 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 AMCO United Holding Limited (HKG:630) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for AMCO United Holding

What Is AMCO United Holding's Net Debt?

As you can see below, AMCO United Holding had HK$30.9m of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds HK$62.0m in cash, so it actually has HK$31.1m net cash.

How Strong Is AMCO United Holding's Balance Sheet?

We can see from the most recent balance sheet that AMCO United Holding had liabilities of HK$76.5m falling due within a year, and liabilities of HK$30.9m due beyond that. Offsetting this, it had HK$62.0m in cash and HK$99.5m in receivables that were due within 12 months. So it can boast HK$54.1m more liquid assets than total liabilities.

This luscious liquidity implies that AMCO United Holding's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, AMCO United Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, AMCO United Holding made a loss at the EBIT level, last year, but improved that to positive EBIT of HK$8.7m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While AMCO United Holding has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. 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 we empathize with investors who find debt concerning, you should keep in mind that AMCO United Holding has net cash of HK$31.1m, as well as more liquid assets than liabilities. So we don't have any problem with AMCO United Holding's use of debt. 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. To that end, you should learn about the 3 warning signs we've spotted with AMCO United Holding (including 1 which can't be ignored) .

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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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.