Anacle Systems (HKG:8353) could easily take on more debt
Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Above all, Anacle Systems Limited (HKG:8353) is in debt. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
Check out our latest analysis for Anacle Systems
How much debt does Anacle Systems have?
As you can see below, at the end of November 2021, Anacle Systems had a debt of S$3.86 million, compared to none a year ago. Click on the image for more details. However, his balance sheet shows that he holds S$11.8 million in cash, so he actually has net cash of S$7.97 million.
How healthy is Anacle Systems’ balance sheet?
Zooming in on the latest balance sheet data, we can see that Anacle Systems had liabilities of S$3.78 million due within 12 months and liabilities of S$3.51 million due beyond. As compensation for these obligations, it had liquid assets of S$11.8 million as well as receivables valued at S$5.24 million maturing within 12 months. So he actually has S$9.80 million After liquid assets than total liabilities.
This excess liquidity suggests that Anacle Systems’ balance sheet could take a hit as well as Homer Simpson’s head may take a hit. From this perspective, lenders should feel as secure as the beloved of a black belt karate master. Simply put, the fact that Anacle Systems has more cash than debt is arguably a good indication that it can safely manage its debt.
But the other side of the coin is that Anacle Systems has seen its EBIT drop by 6.6% over the last year. If earnings continue to decline at this rate, the company could find it increasingly difficult to manage its debt. The balance sheet is clearly the area to focus on when analyzing debt. But it is the profits of Anacle Systems that will influence the balance sheet in the future. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.
Finally, a business needs free cash flow to pay off its debts; book profits are not enough. Although Anacle Systems has net cash on its balance sheet, it’s always worth looking at its ability to convert earnings before interest and taxes (EBIT) to free cash flow, to help us understand how quickly it’s building (or erodes) that treasury. balance. Fortunately for all shareholders, Anacle Systems has actually produced more free cash flow than EBIT for the past two years. This kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.
While it’s always a good idea to investigate a company’s debt, in this case Anacle Systems has $7.97 million in net cash and a decent balance sheet. And it impressed us with a free cash flow of S$1.8m, or 138% of its EBIT. So is Anacle Systems’ debt a risk? This does not seem to us to be the case. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Example: we have identified 2 warning signs for Anacle Systems you should be aware.
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.