Atlinks Group (HKG:8043) Has Debt But No Earnings; Should You Worry?

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.' 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. We can see that Atlinks Group Limited (HKG:8043) does use debt in its business. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Atlinks Group

What Is Atlinks Group's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Atlinks Group had debt of €12.7m, up from €11.8m in one year. However, it also had €1.68m in cash, and so its net debt is €11.1m.

How Healthy Is Atlinks Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Atlinks Group had liabilities of €23.7m due within 12 months and liabilities of €1.59m due beyond that. Offsetting this, it had €1.68m in cash and €9.03m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €14.6m.

The deficiency here weighs heavily on the €9.09m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Atlinks Group would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Atlinks Group's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Atlinks Group made a loss at the EBIT level, and saw its revenue drop to €31m, which is a fall of 3.7%. We would much prefer see growth.

Caveat Emptor

Importantly, Atlinks Group had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at €230k. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of €223k. In the meantime, we consider the stock to be risky. 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. For instance, we've identified 1 warning sign for Atlinks Group that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.