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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. 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. Importantly, AP Rentals Holdings Limited (HKG:1496) does carry debt. But the real question is whether this debt is making the company risky.
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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 AP Rentals Holdings
What Is AP Rentals Holdings's Net Debt?
You can click the graphic below for the historical numbers, but it shows that AP Rentals Holdings had HK$17.5m of debt in March 2019, down from HK$20.1m, one year before. But it also has HK$55.7m in cash to offset that, meaning it has HK$38.2m net cash.
A Look At AP Rentals Holdings's Liabilities
According to the last reported balance sheet, AP Rentals Holdings had liabilities of HK$64.6m due within 12 months, and liabilities of HK$26.9m due beyond 12 months. On the other hand, it had cash of HK$55.7m and HK$39.7m worth of receivables due within a year. So it actually has HK$3.91m more liquid assets than total liabilities.
This short term liquidity is a sign that AP Rentals Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that AP Rentals Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is AP Rentals Holdings'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.
Over 12 months, AP Rentals Holdings made a loss at the EBIT level, and saw its revenue drop to HK$146m, which is a fall of 35%. That makes us nervous, to say the least.