These 4 Measures Indicate That A-Living Smart City Services (HKG:3319) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 A-Living Smart City Services Co., Ltd. (HKG:3319) does use debt in its business. But is this debt a concern to shareholders?

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. 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, 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.

View our latest analysis for A-Living Smart City Services

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

As you can see below, A-Living Smart City Services had CN¥147.7m of debt at June 2023, down from CN¥235.4m a year prior. But it also has CN¥5.76b in cash to offset that, meaning it has CN¥5.61b net cash.

A Look At A-Living Smart City Services' Liabilities

The latest balance sheet data shows that A-Living Smart City Services had liabilities of CN¥8.30b due within a year, and liabilities of CN¥515.6m falling due after that. On the other hand, it had cash of CN¥5.76b and CN¥9.59b worth of receivables due within a year. So it actually has CN¥6.54b more liquid assets than total liabilities.

This surplus strongly suggests that A-Living Smart City Services has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, A-Living Smart City Services boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that A-Living Smart City Services's load is not too heavy, because its EBIT was down 34% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if A-Living Smart City Services can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While A-Living Smart City Services 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, A-Living Smart City Services reported free cash flow worth 18% 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 we empathize with investors who find debt concerning, the bottom line is that A-Living Smart City Services has net cash of CN¥5.61b and plenty of liquid assets. So we are not troubled with A-Living Smart City Services's debt use. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that A-Living Smart City Services insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.