Is Amber Hill Financial Holdings (HKG:33) A Risky Investment?

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.' 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. We can see that Amber Hill Financial Holdings Limited (HKG:33) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Amber Hill Financial Holdings

What Is Amber Hill Financial Holdings's Net Debt?

As you can see below, Amber Hill Financial Holdings had HK$157.5m of debt at June 2021, down from HK$219.5m a year prior. However, its balance sheet shows it holds HK$249.0m in cash, so it actually has HK$91.5m net cash.

How Strong Is Amber Hill Financial Holdings' Balance Sheet?

The latest balance sheet data shows that Amber Hill Financial Holdings had liabilities of HK$244.2m due within a year, and liabilities of HK$1.43m falling due after that. Offsetting these obligations, it had cash of HK$249.0m as well as receivables valued at HK$109.0m due within 12 months. So it can boast HK$112.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Amber Hill Financial Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Amber Hill Financial Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. 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.

Over 12 months, Amber Hill Financial Holdings reported revenue of HK$226m, which is a gain of 162%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

So How Risky Is Amber Hill Financial Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Amber Hill Financial Holdings had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of HK$81m and booked a HK$42m accounting loss. With only HK$91.5m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, Amber Hill Financial Holdings's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with Amber Hill Financial Holdings (at least 2 which are a bit concerning) , and understanding them should be part of your investment process.

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.

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.

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