Yahoo Finanza AKM Industrial (HKG:1639) Seems To Use Debt Quite Sensibly
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'. 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. Importantly, AKM Industrial Company Limited (HKG:1639) does carry debt. But should shareholders be worried about its use of debt?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for AKM Industrial
How Much Debt Does AKM Industrial Carry?
As you can see below, at the end of December 2019, AKM Industrial had HK$39.4m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has HK$119.7m in cash, leading to a HK$80.3m net cash position.
A Look At AKM Industrial's Liabilities
Zooming in on the latest balance sheet data, we can see that AKM Industrial had liabilities of HK$529.7m due within 12 months and liabilities of HK$52.2m due beyond that. Offsetting this, it had HK$119.7m in cash and HK$673.8m in receivables that were due within 12 months. So it actually has HK$211.5m more liquid assets than total liabilities.
This surplus suggests that AKM Industrial has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, AKM Industrial boasts net cash, so it's fair to say it does not have a heavy debt load!
Better yet, AKM Industrial grew its EBIT by 228% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is AKM Industrial's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. AKM Industrial may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, AKM Industrial burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that AKM Industrial has net cash of HK$80.3m, as well as more liquid assets than liabilities. And we liked the look of last year's 228% year-on-year EBIT growth. So we are not troubled with AKM Industrial's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for AKM Industrial that you should be aware of before investing here.
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. Thank you for reading.
