Is Summit Ascent Holdings (HKG:102) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Summit Ascent Holdings Limited (HKG:102) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Summit Ascent Holdings

How Much Debt Does Summit Ascent Holdings Carry?

The image below, which you can click on for greater detail, shows that Summit Ascent Holdings had debt of HK$159.8m at the end of June 2021, a reduction from HK$236.1m over a year. However, its balance sheet shows it holds HK$635.3m in cash, so it actually has HK$475.5m net cash.

How Healthy Is Summit Ascent Holdings' Balance Sheet?

The latest balance sheet data shows that Summit Ascent Holdings had liabilities of HK$49.1m due within a year, and liabilities of HK$192.3m falling due after that. Offsetting these obligations, it had cash of HK$635.3m as well as receivables valued at HK$967.1m due within 12 months. So it can boast HK$1.36b more liquid assets than total liabilities.

This surplus strongly suggests that Summit Ascent Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Summit Ascent Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Summit Ascent Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Summit Ascent Holdings had a loss before interest and tax, and actually shrunk its revenue by 34%, to HK$245m. That makes us nervous, to say the least.

So How Risky Is Summit Ascent Holdings?

Although Summit Ascent Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of HK$57m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. There's no doubt the next few years will be crucial to how the business matures. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Summit Ascent Holdings that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.