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. So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that ABR Holdings Limited (SGX:533) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. 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 ABR Holdings

What Is ABR Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that ABR Holdings had S$160.0k of debt in June 2019, down from S$658.0k, one year before. However, its balance sheet shows it holds S$47.0m in cash, so it actually has S$46.8m net cash.

A Look At ABR Holdings's Liabilities

Zooming in on the latest balance sheet data, we can see that ABR Holdings had liabilities of S$33.2m due within 12 months and liabilities of S$22.1m due beyond that. Offsetting this, it had S$47.0m in cash and S$9.89m in receivables that were due within 12 months. So it actually has S$1.50m more liquid assets than total liabilities.

This state of affairs indicates that ABR Holdings's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the S$148.7m company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, ABR Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for ABR Holdings if management cannot prevent a repeat of the 52% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is ABR Holdings'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. While ABR Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, ABR Holdings actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case ABR Holdings has S$46.8m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of S$15m, being 184% of its EBIT. So we don't have any problem with ABR Holdings's use of debt. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that ABR Holdings insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.