Is Atlinks Group (HKG:8043) Using Debt In A Risky Way?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Atlinks Group Limited (HKG:8043) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

Our analysis indicates that 8043 is potentially overvalued!

How Much Debt Does Atlinks Group Carry?

As you can see below, Atlinks Group had €12.0m of debt at June 2022, down from €12.7m a year prior. On the flip side, it has €2.63m in cash leading to net debt of about €9.39m.

How Strong Is Atlinks Group's Balance Sheet?

According to the last reported balance sheet, Atlinks Group had liabilities of €20.3m due within 12 months, and liabilities of €2.05m due beyond 12 months. Offsetting this, it had €2.63m in cash and €9.75m in receivables that were due within 12 months. So its liabilities total €9.93m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of €8.81m, we think shareholders really should watch Atlinks Group's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. 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 €32m, which is a fall of 3.1%. We would much prefer see growth.

Caveat Emptor

Importantly, Atlinks Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost €113k at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through €4.1m in negative free cash flow over the last year. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Atlinks Group , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.