We Think Associated Industries China (TPE:9912) Has A Fair Chunk Of Debt

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. We can see that Associated Industries China, Inc. (TPE:9912) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 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 Associated Industries China

What Is Associated Industries China's Net Debt?

The image below, which you can click on for greater detail, shows that Associated Industries China had debt of NT$145.5m at the end of December 2020, a reduction from NT$174.0m over a year. On the flip side, it has NT$115.2m in cash leading to net debt of about NT$30.3m.

How Strong Is Associated Industries China's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Associated Industries China had liabilities of NT$260.5m due within 12 months and liabilities of NT$11.3m due beyond that. On the other hand, it had cash of NT$115.2m and NT$55.9m worth of receivables due within a year. So its liabilities total NT$100.7m more than the combination of its cash and short-term receivables.

Associated Industries China has a market capitalization of NT$474.4m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Associated Industries China 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.

In the last year Associated Industries China had a loss before interest and tax, and actually shrunk its revenue by 9.8%, to NT$539m. That's not what we would hope to see.

Caveat Emptor

Importantly, Associated Industries China had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at NT$15m. 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. We would feel better if it turned its trailing twelve month loss of NT$38m into a profit. In the meantime, we consider the stock very risky. 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 Associated Industries China (of which 1 is significant!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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.
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