Does A-Living Smart City Services (HKG:3319) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, A-Living Smart City Services Co., Ltd. (HKG:3319) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for A-Living Smart City Services

What Is A-Living Smart City Services's Debt?

As you can see below, at the end of December 2023, A-Living Smart City Services had CN¥296.8m of debt, up from CN¥104.8m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥6.07b in cash, so it actually has CN¥5.78b net cash.

How Strong Is A-Living Smart City Services' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that A-Living Smart City Services had liabilities of CN¥9.04b due within 12 months and liabilities of CN¥557.1m due beyond that. Offsetting this, it had CN¥6.07b in cash and CN¥9.74b in receivables that were due within 12 months. So it can boast CN¥6.21b more liquid assets than total liabilities.

This surplus liquidity suggests that A-Living Smart City Services' 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, A-Living Smart City Services boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for A-Living Smart City Services if management cannot prevent a repeat of the 40% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine A-Living Smart City Services's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. A-Living Smart City Services may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, A-Living Smart City Services's free cash flow amounted to 22% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case A-Living Smart City Services has CN¥5.78b in net cash and a strong balance sheet. So we don't have any problem with A-Living Smart City Services's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - A-Living Smart City Services has 3 warning signs we think you should be aware of.

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.