Does Aurum Pacific (China) Group (HKG:8148) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Aurum Pacific (China) Group Limited (HKG:8148) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Aurum Pacific (China) Group

What Is Aurum Pacific (China) Group's Debt?

The image below, which you can click on for greater detail, shows that Aurum Pacific (China) Group had debt of HK$35.0m at the end of June 2021, a reduction from HK$38.2m over a year. On the flip side, it has HK$5.19m in cash leading to net debt of about HK$29.8m.

A Look At Aurum Pacific (China) Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Aurum Pacific (China) Group had liabilities of HK$46.9m due within 12 months and no liabilities due beyond that. Offsetting this, it had HK$5.19m in cash and HK$75.6m in receivables that were due within 12 months. So it actually has HK$33.9m more liquid assets than total liabilities.

This surplus liquidity suggests that Aurum Pacific (China) Group's 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. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Aurum Pacific (China) Group 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.

Given it has no significant operating revenue at the moment, shareholders will be hoping Aurum Pacific (China) Group can make progress and gain better traction for the business, before it runs low on cash.

Caveat Emptor

While Aurum Pacific (China) Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable HK$64m at the EBIT level. Having said that, the balance sheet has plenty of liquid assets for now. That will give the company some time and space to grow and develop its business as need be. The company is risky because it will grow into the future to get to profitability and free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Aurum Pacific (China) Group (of which 3 are a bit concerning!) you should know about.

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.

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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.
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