Asia Tele-Net and Technology (HKG:679) Seems To Use Debt Rather Sparingly

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Asia Tele-Net and Technology Corporation Limited (HKG:679) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

See our latest analysis for Asia Tele-Net and Technology

What Is Asia Tele-Net and Technology's Debt?

The image below, which you can click on for greater detail, shows that Asia Tele-Net and Technology had debt of HK$27.5m at the end of June 2023, a reduction from HK$261.0m over a year. However, its balance sheet shows it holds HK$728.2m in cash, so it actually has HK$700.7m net cash.

A Look At Asia Tele-Net and Technology's Liabilities

According to the last reported balance sheet, Asia Tele-Net and Technology had liabilities of HK$323.2m due within 12 months, and liabilities of HK$121.5m due beyond 12 months. Offsetting these obligations, it had cash of HK$728.2m as well as receivables valued at HK$155.0m due within 12 months. So it actually has HK$438.5m more liquid assets than total liabilities.

This excess liquidity is a great indication that Asia Tele-Net and Technology's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Asia Tele-Net and Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Asia Tele-Net and Technology made a loss at the EBIT level, last year, it was also good to see that it generated HK$10.0m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Asia Tele-Net and Technology 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Asia Tele-Net and Technology 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, Asia Tele-Net and Technology actually produced more free cash flow than EBIT over the last year. 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 Asia Tele-Net and Technology has HK$700.7m in net cash and a strong balance sheet. The cherry on top was that in converted 222% of that EBIT to free cash flow, bringing in HK$22m. So is Asia Tele-Net and Technology's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Asia Tele-Net and Technology you should be aware of, and 1 of them is a bit concerning.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.