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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that AMCO United Holding Limited (HKG:630) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for AMCO United Holding

What Is AMCO United Holding's Net Debt?

As you can see below, at the end of December 2020, AMCO United Holding had HK$33.7m of debt, up from HK$30.7m a year ago. Click the image for more detail. On the flip side, it has HK$28.5m in cash leading to net debt of about HK$5.19m.

A Look At AMCO United Holding's Liabilities

Zooming in on the latest balance sheet data, we can see that AMCO United Holding had liabilities of HK$47.0m due within 12 months and liabilities of HK$33.7m due beyond that. On the other hand, it had cash of HK$28.5m and HK$144.7m worth of receivables due within a year. So it can boast HK$92.6m more liquid assets than total liabilities.

It's good to see that AMCO United Holding has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. 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.

In the last year AMCO United Holding had a loss before interest and tax, and actually shrunk its revenue by 20%, to HK$54m. That makes us nervous, to say the least.

Caveat Emptor

While AMCO United Holding's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping HK$32m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. So it seems too risky for our taste. 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. Case in point: We've spotted 4 warning signs for AMCO United Holding you should be aware of, and 1 of them is concerning.

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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