Is AM Group Holdings (HKG:1849) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies AM Group Holdings Limited (HKG:1849) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for AM Group Holdings

How Much Debt Does AM Group Holdings Carry?

As you can see below, AM Group Holdings had S$2.82m of debt at December 2023, down from S$3.26m a year prior. However, its balance sheet shows it holds S$25.1m in cash, so it actually has S$22.3m net cash.

How Strong 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$23.6m due within 12 months and liabilities of S$1.70m due beyond that. Offsetting this, it had S$25.1m in cash and S$19.4m in receivables that were due within 12 months. So it can boast S$19.2m more liquid assets than total liabilities.

This surplus liquidity suggests that AM Group Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, AM Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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.

In the last year AM Group Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 4.4%, to S$40m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is AM Group Holdings?

Although AM Group Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of S$7.4m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. There's no doubt the next few years will be crucial to how the business matures. 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. Be aware that AM Group Holdings is showing 2 warning signs in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.