Is Advanced Holdings (SGX:BLZ) Using Debt Sensibly?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Advanced Holdings Ltd. (SGX:BLZ) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Advanced Holdings

How Much Debt Does Advanced Holdings Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Advanced Holdings had debt of S$9.79m, up from S$5.51m in one year. However, its balance sheet shows it holds S$31.5m in cash, so it actually has S$21.8m net cash.

How Healthy Is Advanced Holdings' Balance Sheet?

We can see from the most recent balance sheet that Advanced Holdings had liabilities of S$22.6m falling due within a year, and liabilities of S$10.8m due beyond that. On the other hand, it had cash of S$31.5m and S$18.6m worth of receivables due within a year. So it actually has S$16.7m more liquid assets than total liabilities.

This surplus strongly suggests that Advanced Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). 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 made a loss at the EBIT level, and saw its revenue drop to S$59m, which is a fall of 35%. That makes us nervous, to say the least.

So How Risky Is Advanced Holdings?

Although Advanced Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of S$2.8m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. The next few years will be important as the business matures. 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 3 warning signs with Advanced Holdings (at least 1 which is a bit unpleasant) , 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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