AM Group Holdings (HKG:1849) Has A Pretty Healthy Balance Sheet

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.' 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 AM Group Holdings Limited (HKG:1849) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 AM Group Holdings

How Much Debt Does AM Group Holdings Carry?

The image below, which you can click on for greater detail, shows that at June 2021 AM Group Holdings had debt of S$2.56m, up from S$2.11m in one year. But it also has S$14.3m in cash to offset that, meaning it has S$11.8m net cash.

How Healthy Is AM Group Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that AM Group Holdings had liabilities of S$23.3m due within 12 months and liabilities of S$3.09m due beyond that. On the other hand, it had cash of S$14.3m and S$16.7m worth of receivables due within a year. So it can boast S$4.61m more liquid assets than total liabilities.

This surplus suggests that AM Group Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that AM Group Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that AM Group Holdings grew its EBIT by 191% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is AM Group Holdings'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While AM Group Holdings 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 three years, AM Group Holdings reported free cash flow worth 12% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case AM Group Holdings has S$11.8m in net cash and a decent-looking balance sheet. And we liked the look of last year's 191% year-on-year EBIT growth. So is AM Group Holdings's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for AM Group Holdings 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.

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.

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