Here's Why AMCO United Holding (HKG:630) Can Afford Some Debt

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. As with many other companies AMCO United Holding Limited (HKG:630) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for AMCO United Holding

How Much Debt Does AMCO United Holding Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 AMCO United Holding had HK$51.7m of debt, an increase on HK$32.2m, over one year. On the flip side, it has HK$34.1m in cash leading to net debt of about HK$17.6m.

How Strong Is AMCO United Holding's Balance Sheet?

According to the last reported balance sheet, AMCO United Holding had liabilities of HK$30.2m due within 12 months, and liabilities of HK$50.3m due beyond 12 months. Offsetting these obligations, it had cash of HK$34.1m as well as receivables valued at HK$117.8m due within 12 months. So it actually has HK$71.4m 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since AMCO United Holding will need earnings to service that debt. 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.

Over 12 months, AMCO United Holding reported revenue of HK$67m, which is a gain of 20%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months AMCO United Holding produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable HK$19m at the EBIT level. Having said that, the balance sheet has plenty of liquid assets for now. That will give the company some time and space to grow and develop its business as need be. The company is risky because it will grow into the future to get to profitability and free cash flow. 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 2 warning signs for AMCO United Holding that you should be aware of before investing here.

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.

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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.