A-Living Smart City Services (HKG:3319) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, '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. Importantly, A-Living Smart City Services Co., Ltd. (HKG:3319) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 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¥61.4m of debt at June 2021, down from CN¥354.7m a year prior. However, it does have CN¥8.89b in cash offsetting this, leading to net cash of CN¥8.83b.

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

According to the last reported balance sheet, A-Living Smart City Services had liabilities of CN¥6.81b due within 12 months, and liabilities of CN¥507.2m due beyond 12 months. On the other hand, it had cash of CN¥8.89b and CN¥4.33b worth of receivables due within a year. So it actually has CN¥5.90b more liquid assets than total liabilities.

It's good to see that A-Living Smart City Services 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. Succinctly put, A-Living Smart City Services boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, A-Living Smart City Services grew its EBIT by 46% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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'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 recorded free cash flow worth a fulsome 95% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case A-Living Smart City Services has CN¥8.83b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥2.4b, being 95% of its EBIT. When it comes to A-Living Smart City Services's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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. To that end, you should be aware of the 3 warning signs we've spotted with A-Living Smart City Services .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.