Is Asia Grocery Distribution (HKG:8413) Weighed On By Its Debt Load?

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 Asia Grocery Distribution Limited (HKG:8413) 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?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Asia Grocery Distribution

How Much Debt Does Asia Grocery Distribution Carry?

The image below, which you can click on for greater detail, shows that at March 2023 Asia Grocery Distribution had debt of HK$19.8m, up from HK$8.47m in one year. But on the other hand it also has HK$35.0m in cash, leading to a HK$15.2m net cash position.

How Healthy Is Asia Grocery Distribution's Balance Sheet?

The latest balance sheet data shows that Asia Grocery Distribution had liabilities of HK$25.0m due within a year, and liabilities of HK$13.6m falling due after that. On the other hand, it had cash of HK$35.0m and HK$40.2m worth of receivables due within a year. So it actually has HK$36.6m more liquid assets than total liabilities.

It's good to see that Asia Grocery Distribution has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Asia Grocery Distribution boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Asia Grocery Distribution's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Asia Grocery Distribution wasn't profitable at an EBIT level, but managed to grow its revenue by 20%, to HK$296m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Asia Grocery Distribution?

While Asia Grocery Distribution lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$11m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Asia Grocery Distribution (2 shouldn't be ignored!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.