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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Allan International Holdings Limited (HKG:684) makes use of debt. But the more important question is: how much risk is that debt creating?
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. 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, 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.
View our latest analysis for Allan International Holdings
What Is Allan International Holdings's Debt?
You can click the graphic below for the historical numbers, but it shows that Allan International Holdings had HK$36.3m of debt in March 2019, down from HK$41.4m, one year before. But on the other hand it also has HK$624.9m in cash, leading to a HK$588.6m net cash position.
How Strong Is Allan International Holdings's Balance Sheet?
According to the last reported balance sheet, Allan International Holdings had liabilities of HK$324.5m due within 12 months, and liabilities of HK$38.4m due beyond 12 months. Offsetting this, it had HK$624.9m in cash and HK$268.3m in receivables that were due within 12 months. So it actually has HK$530.3m more liquid assets than total liabilities.
This surplus liquidity suggests that Allan International Holdings's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Simply put, the fact that Allan International 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 Allan International Holdings will need earnings to service that debt. 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.