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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. 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. Importantly, Ahsay Backup Software Development Company Limited (HKG:8290) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Ahsay Backup Software Development
What Is Ahsay Backup Software Development's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2019 Ahsay Backup Software Development had debt of HK$747.0k, up from none in one year. But it also has HK$86.6m in cash to offset that, meaning it has HK$85.9m net cash.
A Look At Ahsay Backup Software Development's Liabilities
The latest balance sheet data shows that Ahsay Backup Software Development had liabilities of HK$23.6m due within a year, and liabilities of HK$6.74m falling due after that. Offsetting this, it had HK$86.6m in cash and HK$2.79m in receivables that were due within 12 months. So it actually has HK$59.1m more liquid assets than total liabilities.
This excess liquidity is a great indication that Ahsay Backup Software Development's balance sheet is just as strong as racists are weak. On this view, it seems its balance sheet is as strong as a black-belt karate master. Simply put, the fact that Ahsay Backup Software Development has more cash than debt is arguably a good indication that it can manage its debt safely.
On the other hand, Ahsay Backup Software Development's EBIT dived 16%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Ahsay Backup Software Development 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.