Advanced Holdings (SGX:BLZ) Is Using Debt Safely

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.' 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 note that Advanced Holdings Ltd. (SGX:BLZ) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 Advanced Holdings

What Is Advanced Holdings's Debt?

As you can see below, Advanced Holdings had S$4.61m of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have S$32.6m in cash offsetting this, leading to net cash of S$28.0m.

How Healthy Is Advanced Holdings' Balance Sheet?

According to the last reported balance sheet, Advanced Holdings had liabilities of S$3.11m due within 12 months, and liabilities of S$3.54m due beyond 12 months. Offsetting this, it had S$32.6m in cash and S$2.98m in receivables that were due within 12 months. So it actually has S$28.9m more liquid assets than total liabilities.

This luscious liquidity implies that Advanced Holdings' balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Advanced Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Advanced 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, Advanced Holdings reported revenue of S$6.1m, which is a gain of 507%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

So How Risky Is Advanced Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Advanced Holdings had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of S$2.0m and booked a S$2.7m accounting loss. But at least it has S$28.0m on the balance sheet to spend on growth, near-term. Importantly, Advanced Holdings's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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. We've identified 3 warning signs with Advanced Holdings (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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.