Is Summit Ascent Holdings (HKG:102) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that Summit Ascent Holdings Limited (HKG:102) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

Check out our latest analysis for Summit Ascent Holdings

What Is Summit Ascent Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Summit Ascent Holdings had debt of HK$155.0m at the end of December 2020, a reduction from HK$223.2m over a year. But it also has HK$1.56b in cash to offset that, meaning it has HK$1.41b net cash.

How Healthy Is Summit Ascent Holdings' Balance Sheet?

We can see from the most recent balance sheet that Summit Ascent Holdings had liabilities of HK$45.3m falling due within a year, and liabilities of HK$195.7m due beyond that. On the other hand, it had cash of HK$1.56b and HK$9.48m worth of receivables due within a year. So it actually has HK$1.33b more liquid assets than total liabilities.

This luscious liquidity implies that Summit Ascent Holdings' balance sheet is sturdy like a giant sequoia tree. 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 it is future earnings, more than anything, that will determine Summit Ascent Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Summit Ascent Holdings had a loss before interest and tax, and actually shrunk its revenue by 60%, to HK$211m. 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$10m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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 2 warning signs for Summit Ascent Holdings (1 is a bit unpleasant) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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.
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