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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.' 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. We note that Able Engineering Holdings Limited (HKG:1627) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Able Engineering Holdings
How Much Debt Does Able Engineering Holdings Carry?
The image below, which you can click on for greater detail, shows that Able Engineering Holdings had debt of HK$377.0k at the end of March 2019, a reduction from HK$7.31m over a year. However, it does have HK$905.3m in cash offsetting this, leading to net cash of HK$905.0m.
A Look At Able Engineering Holdings's Liabilities
According to the balance sheet data, Able Engineering Holdings had liabilities of HK$732.8m due within 12 months, but no longer term liabilities. Offsetting these obligations, it had cash of HK$905.3m as well as receivables valued at HK$330.4m due within 12 months. So it can boast HK$502.9m more liquid assets than total liabilities.
This surplus liquidity suggests that Able Engineering Holdings's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Simply put, the fact that Able Engineering Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.
In fact Able Engineering Holdings's saving grace is its low debt levels, because its EBIT has tanked 24% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Able Engineering Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.