Would Aurum Pacific (China) Group (HKG:8148) Be Better Off With Less Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Aurum Pacific (China) Group Limited (HKG:8148) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Aurum Pacific (China) Group

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

You can click the graphic below for the historical numbers, but it shows that Aurum Pacific (China) Group had HK$38.2m of debt in June 2020, down from HK$40.3m, one year before. However, because it has a cash reserve of HK$24.7m, its net debt is less, at about HK$13.5m.

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

According to the last reported balance sheet, Aurum Pacific (China) Group had liabilities of HK$48.5m due within 12 months, and liabilities of HK$4.74m due beyond 12 months. On the other hand, it had cash of HK$24.7m and HK$104.8m worth of receivables due within a year. So it can boast HK$76.3m more liquid assets than total liabilities.

This excess liquidity is a great indication that Aurum Pacific (China) Group's balance sheet is just as strong as racists are weak. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, Aurum Pacific (China) Group made a loss at the EBIT level, and saw its revenue drop to HK$35m, which is a fall of 21%. That makes us nervous, to say the least.

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$72m at the EBIT level. That said, we're impressed with the strong balance sheet liquidity. That should give the business time to grow its cashflow. 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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Aurum Pacific (China) Group you should be aware of, and 2 of them are a bit concerning.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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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