We Think AMS Public Transport Holdings (HKG:77) Has A Fair Chunk Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, AMS Public Transport Holdings Limited (HKG:77) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for AMS Public Transport Holdings

What Is AMS Public Transport Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that AMS Public Transport Holdings had HK$123.5m of debt in September 2023, down from HK$141.2m, one year before. However, it also had HK$57.2m in cash, and so its net debt is HK$66.3m.

A Look At AMS Public Transport Holdings' Liabilities

According to the last reported balance sheet, AMS Public Transport Holdings had liabilities of HK$56.1m due within 12 months, and liabilities of HK$117.0m due beyond 12 months. Offsetting this, it had HK$57.2m in cash and HK$8.00m in receivables that were due within 12 months. So its liabilities total HK$107.9m more than the combination of its cash and short-term receivables.

AMS Public Transport Holdings has a market capitalization of HK$195.8m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since AMS Public Transport 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, AMS Public Transport Holdings reported revenue of HK$388m, which is a gain of 14%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, AMS Public Transport Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost HK$793k at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of HK$498k. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for AMS Public Transport Holdings 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.