Would Associated Industries China (TPE:9912) Be Better Off With Less Debt?

Warren Buffett famously said, '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. As with many other companies Associated Industries China, Inc. (TPE:9912) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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?

As you can see below, Associated Industries China had NT$192.0m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it also had NT$87.6m in cash, and so its net debt is NT$104.4m.

How Strong Is Associated Industries China's Balance Sheet?

According to the last reported balance sheet, Associated Industries China had liabilities of NT$293.6m due within 12 months, and liabilities of NT$12.2m due beyond 12 months. Offsetting this, it had NT$87.6m in cash and NT$54.9m in receivables that were due within 12 months. So it has liabilities totalling NT$163.3m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Associated Industries China has a market capitalization of NT$390.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is Associated Industries China's earnings that will influence how the balance sheet holds up in the future. 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 16%, to NT$533m. We would much prefer see growth.

Caveat Emptor

While Associated Industries China's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at NT$20m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of NT$101m into a profit. So in short it's a really risky stock. 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. Take risks, for example - Associated Industries China has 2 warning signs (and 1 which is potentially serious) we think you should know about.

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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