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Warren Buffett famously said, '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. As with many other companies Amuse Group Holding Limited (HKG:8545) makes use of debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Amuse Group Holding
What Is Amuse Group Holding's Debt?
The chart below, which you can click on for greater detail, shows that Amuse Group Holding had HK$6.37m in debt in March 2019; about the same as the year before. But on the other hand it also has HK$139.7m in cash, leading to a HK$133.4m net cash position.
How Strong Is Amuse Group Holding's Balance Sheet?
The latest balance sheet data shows that Amuse Group Holding had liabilities of HK$26.2m due within a year, and liabilities of HK$771.0k falling due after that. Offsetting these obligations, it had cash of HK$139.7m as well as receivables valued at HK$21.1m due within 12 months. So it actually has HK$133.8m more liquid assets than total liabilities.
This surplus strongly suggests that Amuse Group Holding has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, it seems its balance sheet is as strong as a black-belt karate master. Simply put, the fact that Amuse Group Holding has more cash than debt is arguably a good indication that it can manage its debt safely.
The good news is that Amuse Group Holding has increased its EBIT by 7.3% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Amuse Group Holding 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.