Here's Why Amber Hill Financial Holdings (HKG:33) Can Manage Its Debt Responsibly

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.' 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. Importantly, Amber Hill Financial Holdings Limited (HKG:33) does carry debt. But should shareholders be worried about its use of debt?

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 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Amber Hill Financial Holdings

What Is Amber Hill Financial Holdings's Debt?

The image below, which you can click on for greater detail, shows that at December 2021 Amber Hill Financial Holdings had debt of HK$1.28b, up from HK$164.3m in one year. But it also has HK$1.39b in cash to offset that, meaning it has HK$115.5m net cash.

How Healthy Is Amber Hill Financial Holdings' Balance Sheet?

We can see from the most recent balance sheet that Amber Hill Financial Holdings had liabilities of HK$1.41b falling due within a year, and liabilities of HK$1.38m due beyond that. Offsetting these obligations, it had cash of HK$1.39b as well as receivables valued at HK$110.1m due within 12 months. So it can boast HK$94.5m more liquid assets than total liabilities.

This surplus suggests that Amber Hill Financial Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Amber Hill Financial Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Amber Hill Financial Holdings made a loss at the EBIT level, last year, but improved that to positive EBIT of HK$18m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Amber Hill Financial Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Amber Hill Financial Holdings 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. During the last year, Amber Hill Financial Holdings burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Amber Hill Financial Holdings has HK$115.5m in net cash and a decent-looking balance sheet. So we don't have any problem with Amber Hill Financial Holdings's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Amber Hill Financial Holdings (including 1 which is potentially serious) .

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.